What Is Voluntary Repossession?

Voluntary repossession is when you as the holder of the vehicle are willingly returning it to the lender. This means lenders do not have to hire agencies to search for and repossess the car on their terms.

Reasons you may need to hand your car back to a lender

• Financial hardship: When faced with financial difficulties such as job loss, mounting debt, or unexpected expenses, individuals may find it challenging to keep up with their car loan payments. Voluntarily surrendering the vehicle allows them to alleviate the financial burden and seek more affordable transportation options.
• Negative equity: Some car owners may find themselves in a situation where the value of their vehicle has significantly depreciated, while the remaining loan balance remains high. This negative equity makes it difficult to sell the car or refinance the loan, leading to the decision of voluntary repossession as a means to escape the financial strain.
• High maintenance and repair costs: Aging vehicles or those with persistent mechanical issues can become a financial drain. When the cost of maintaining and repairing the car exceeds its value, borrowers may choose to voluntarily surrender the vehicle to avoid further expenses and explore more reliable transportation alternatives.
• Lifestyle changes: Life circumstances can change unexpectedly, requiring adjustments in transportation needs. This can include downsizing due to a change in family size, relocation to an area with better public transportation, or transitioning to a job that provides a company vehicle. In such cases, voluntarily returning the car allows individuals to align their transportation choices with their new circumstances.
• Impending repossession: If borrowers anticipate that their vehicle will be repossessed by the lender due to missed payments or defaulting on the loan agreement, they may opt for a voluntary repossession. By taking this proactive step, individuals can regain some control over the situation and potentially minimize the negative impact on their credit score. It is then possible to buy a much more affordable used model for cash, putting you in a better financial position with lower monthly payments. Or consider a complete solution with FINN. Ideal for a short-term subscription to your next car with one easy monthly payment for insurance, maintenance, and roadside assistance.
• Limited Usage: Certain circumstances, such as extended travel, a medical condition, or lifestyle changes, may significantly reduce the need for a car. In such cases, voluntarily returning the vehicle allows individuals to avoid unnecessary costs associated with ownership, including insurance, maintenance, and parking fees.

It's important to note that voluntary repossession should be carefully considered, as it can have consequences which we will dive into. Consulting with financial advisors or seeking guidance from legal professionals is advisable to make an informed decision.

Voluntary repossession is a significant decision that can have various effects on individuals and their credit. There is also a long-lasting effect in other areas of finance including mortgages and loans. These are the main implications of voluntary repossession:

Remaining debt to the lender: Even after surrendering the car, you may still owe the lender money if they can't get the full remaining loan balance from selling it. So you could be on the hook for whatever's left over, plus any fees like late charges. If you don't pay up, the lender may send your account to collections or take legal action. Both of those can hurt your credit and lead to having your income garnished to pay off what you owe.

Credit report implications: The voluntary repossession and any related collections or legal judgments can stay on your credit reports for years, damaging your credit score. Credit agencies may label it as a "voluntary surrender" instead of a standard repossession. But it still drags down your creditworthiness, even if not quite as severely.

Potential loan difficulties: The hit to your credit from a voluntary repossession can make it really tough to get approved for future loans. And if you do manage to qualify, lenders will likely charge you higher interest rates since they'll see you as a riskier borrower more likely to default on payments.

How much damage does voluntary repossession do to your credit?

Voluntary repossession can do significant damage to your credit score and history. Here's a quick overview of the potential impact:

• The repossession will be added to your credit report and can stay there for up to 7 years. It will show up as a derogatory mark.
• Your credit score could drop by between 100-300 points. The higher your score was before, the steeper the drop. Someone with a 700 score could see it fall to 500.
• Your credit utilization ratio will be affected if the repossessed car loan made up a large portion of your available credit. This ratio factors heavily in credit scores.
• Future lenders will view you as a high-risk borrower who may default again. This makes getting approved for loans and credit cards much tougher.
• If approved, expect to pay significantly higher interest rates due to your damaged credit. Rates could be over 10-15% higher than with good credit.
• Other negative marks like collections or legal judgments related to the repo will also drag your score down.
• It can take years to fully rebuild your credit after a voluntary repossession. Consistent on-time payments and keeping credit card balances low will help over time.

How long does a repossession stay on your credit?

A repossession can remain on your credit report for up to 7 years from the date it took place. The repossession will first appear on your credit report around 1-2 months after it happens, which is when the lender reports it to the credit bureaus. It will then stay on your credit history for the full 7 years from the initial date of repossession. During this time, the negative impact to your credit score will be most severe in the beginning but gradually decrease over the years as your score slowly recovers. 

However, even once the repossession falls off your report after 7 years, it can still indirectly influence your credit score for a period, since credit scoring models may factor it in for a few more years. You'll likely see pre-approved credit offers dry up while the repossession remains on your record. After the full 7 years, the repossession will no longer be calculated into your score, but the prior damage to your credit can still make getting new credit more challenging. So expect the impact to last the entire 7 years, with the worst damage happening in the first couple years, before your credit can fully recover.

How do you get out of a car loan you can't afford?

If you find yourself unable to afford a car loan, there are several potential solutions to explore. 

Tell your lender: If those car payments are becoming too much to handle, it's a smart move to get in touch with your lender and let them know what's going on. Explain the financial struggles you're having at the moment. Many lenders are willing to work with customers - they may be able to modify the loan terms to make it more affordable for you right now. Or they could give you some extra time to repay it by extending the loan period. Some may even agree to temporarily lower the monthly payments. 

Refinance the auto loan: Looking into refinancing the loan could be a good move too. You may be able to get a new loan with better rates or terms that work for your budget. Trading the car in for something more affordable, or even selling it and paying off the loan, are other avenues that could help ease the financial pressure. And talking to credit counseling services or financial advisors could give you customized guidance based on your particular circumstances. There are usually multiple options and professional advice out there that can help make an unaffordable car payment manageable again.

Voluntary repossession is a significant decision that should be carefully considered, and seeking guidance from professionals, such as legal or financial advisors, is strongly recommended. While the exact process may vary, here are general steps that are typically involved in voluntary repossession:

• Review loan agreement: Carefully review the terms and conditions of your car loan agreement to understand your rights and obligations in the event of repossession. Note any specific instructions or requirements provided by the lender.
• Contact the lender: Initiate communication with your lender to inform them of your intention to voluntarily surrender the vehicle. This can be done through a written notice or by contacting the lender directly. Seek clarification on the procedures they require for a voluntary repossession.
• Schedule vehicle pickup or drop-off: Coordinate with the lender to arrange the logistics of returning the vehicle. This may involve scheduling a pickup by a repossession agent or arranging a drop-off at a designated location.
• Remove personal belongings: Before the repossession, ensure that you remove all personal belongings from the vehicle. Double-check compartments, the trunk, and any storage areas to collect your belongings.
• Document vehicle condition: Before handing over the vehicle, document its condition by taking photographs or videos. This can serve as evidence in case of any disputes regarding damage or valuation.
• Obtain written confirmation: Request written confirmation from the lender stating that the voluntary repossession has been completed and specifying any remaining obligations or outstanding balances.

Throughout the process, it is crucial to consult professionals familiar with the laws and regulations. Legal and financial advisors can provide personalized guidance, ensuring you understand the potential implications and obligations associated with voluntary repossession.

When facing financial difficulties with a car loan, it's essential to explore alternative options before considering voluntary repossession. Here are alternatives to consider:

• Loan modification: Contact your lender to discuss loan modification options. They may be willing to adjust the terms of your loan, such as extending the repayment period, reducing interest rates, or temporarily lowering payments to make them more manageable.
• Refinancing: With refinancing, you basically get a new car loan to pay off the current one. The goal is to score better rates and terms that lower your monthly payment. Refinancing under improved terms can potentially slash your payments and make them fit your budget again. So if those high monthly amounts are crushing you, definitely look into refinancing. It's a viable option if you need to reduce the payments and regain affordability. A refi could potentially get those amounts down to a comfortable level that works with your finances.
• Selling the vehicle: Consider selling the car to pay off the loan. If the car's value is higher than the outstanding loan balance, selling it can help you avoid repossession and potentially eliminate the debt. However, if the car's value is lower than the loan balance, you may need to negotiate with the lender to settle the remaining amount. Once you are in a better financial position you can then purchase a used car at a much lower price as a replacement.
• Negotiating with the lender: Being upfront with your lender and having an open conversation is really important. Walk them through your whole financial picture and current challenges you're facing. Discuss any ideas you may have for solutions and get their thoughts too. Many times lenders are motivated to find an arrangement that works for both of you. If you're transparent about the situation and brainstorm options together, there's a good possibility your lender will collaborate to land on a solution that is mutually beneficial.
• Seeking professional advice: If your car loan is becoming a major burden, talking to a financial pro can provide some much-needed perspective. Sitting down with a credit counselor or advisor gives them a chance to take a comprehensive look at your situation and suggest options tailored for your needs. They will know all the pros and cons of voluntarily repossessing your car and they will walk you through how it could impact your credit, leftover debts, and long-term money situation.  

Taking a realistic look at your income, regular bills, and total debts helps determine if the payments have become truly unworkable, or if you can rearrange things to afford the car. Keep in mind that surrendering the car can ding your credit, leave you with remaining balance debts, and make getting future loans tough. The advisor will talk all of this through with you, to figure out the smartest personal path forward.