What Happens If You Let a Car Go Back?
Learn what happens when you voluntarily return a car. Understand the financial and credit implications, plus alternatives to consider.
When facing difficulties with car loan payments, borrowers sometimes consider “letting a car go back,” which refers to a voluntary vehicle surrender. This action is initiated by the borrower to return the vehicle to the lender due to an inability to meet contractual payment obligations. It is a proactive step to address financial hardship before the lender initiates an involuntary repossession.
Understanding Voluntary Vehicle Surrender
Voluntary vehicle surrender involves the borrower willingly returning their financed car to the lender. This option arises when an individual experiences financial hardship, such as job loss, reduced income, or unexpected expenses, making it impossible to continue monthly car payments. While it might seem like a way to walk away from a debt, surrendering the vehicle does not automatically eliminate the loan obligation.
Instead, it acknowledges to the lender that the borrower cannot fulfill the loan agreement terms. This differs from an involuntary repossession, where the lender seizes the vehicle without the borrower’s consent or warning. A voluntary surrender may offer the borrower more control over the return process, avoiding the stress and inconvenience of an unannounced vehicle seizure.
Process of Vehicle Surrender
Initiating a voluntary vehicle surrender begins with contacting the lender to inform them of the inability to make payments and intent to return the vehicle. The lender will then provide instructions on how and where to return the car. This might involve dropping the vehicle off at a designated location, such as a dealership or a specific lot, or arranging for the lender or their agent to pick it up.
Before returning the vehicle, remove all personal belongings and ensure the car is empty. Gather all keys, the vehicle title, and any manuals or accessories that came with the car, as the lender will request these items. The lender may ask the borrower to sign a surrender agreement, which formally documents the return of the vehicle. Keep records of the surrender, including the date, location, and the name of the person who accepted the vehicle.
Financial Outcomes of Surrender
Despite voluntarily surrendering a vehicle, the borrower remains responsible for any outstanding debt after the car is sold. This remaining amount is known as a “deficiency balance.” The deficiency balance is calculated as the difference between the outstanding loan amount and the price the lender receives from selling the vehicle, plus any associated fees like repossession, storage, or auction costs. Vehicles sold at auction often fetch prices below market value, which can result in a substantial deficiency balance. For example, if a borrower owes $10,000 and the car sells for $7,000, the borrower would still owe the $3,000 difference, plus fees.
A voluntary surrender negatively impacts the borrower’s credit report, similar to an involuntary repossession. It will appear as a “repossession” or “voluntary surrender” and remain on the credit report for up to seven years from the date of default. This derogatory mark can significantly lower credit scores, making it difficult to obtain new credit, loans, or housing at favorable terms.
The lender will pursue collection of the deficiency balance. This may involve the debt being sold to a collection agency, which can further impact credit. If the deficiency balance is not paid, the lender may file a lawsuit to obtain a court judgment against the borrower. A judgment could lead to severe consequences, such as wage garnishment or bank levies.
Alternative Solutions for Vehicle Loans
Before considering voluntary surrender, borrowers have several alternative solutions to manage their vehicle loan obligations. Refinancing the loan is one option, involving securing a new loan with a lower interest rate or an extended repayment term to reduce monthly payments, though a longer term may increase total interest paid. Another possibility is to negotiate directly with the current lender for a loan modification or payment deferment. Lenders may offer temporary hardship programs, allowing payments to be paused or reduced for a short period, or they might adjust loan terms permanently to make payments more manageable.
Selling the vehicle can also be a viable alternative, especially if the car’s market value is equal to or greater than the outstanding loan balance. A private sale or trade-in to a dealership can help pay off the loan and avoid a deficiency balance. If the vehicle’s value is less than the loan amount, the borrower would need to pay the difference to fully satisfy the loan. Negotiating a settlement with the lender for a reduced payoff amount is another strategy, though this can still have credit implications.
As a last resort, bankruptcy can offer debt relief, including car loans, by discharging the debt or incorporating it into a repayment plan. However, bankruptcy has significant and long-lasting credit consequences.