When money is tight and there’s no quick fix on the horizon, your thoughts might turn to mitigating the damage of missed payments rather than avoiding them entirely. You may save yourself a little money if you turn your car over to the lender rather than let it repossess the vehicle. If you’re thinking it might save your credit score, however, that probably won’t happen. Plan on your credit taking a hit, although the hit may be fractionally less than what occurs with a traditional repossession.
How a Voluntary Repossession Works
The most significant difference between a repossession and a voluntary repossession is the way it takes place. This aspect can marginally affect your credit and save you a little money. For a voluntary repossession, contact the lender to let it know you want to give up the car. The lender will tell you when and where you can drop the vehicle off. This saves the costs of repossession, which you would otherwise be responsible for.
The Deficiency Balance
After you return the car, the process is much the same as an ordinary repossession. The lender will sell the vehicle, typically at auction, to try to collect as much of your loan balance as possible. But you’ve still defaulted on the loan – voluntarily giving up the vehicle doesn’t erase your liability under the terms of the contract you signed. If the car sells for less than your remaining loan balance, you still owe the difference, called a deficiency balance. If you suspect that the deficiency is going to be significant, try to work out a payment plan with your lender at the time you discuss turning the car over. This might seem counterproductive – you returned the car because you couldn’t make your car payments, after all – but the payments may be less than those you were making on the loan.
The Effect on Your Credit
If you owe a deficiency balance, your credit can take a double hit. The lender reports the repossession to the credit bureaus as a defaulted loan, and the deficiency debt shows up there as well. The deficiency remains an open account on your credit report until you satisfy the balance unless the lender agrees not to report it in exchange for you entering into a payment plan. Otherwise, the debt gets older and older each month that at least part of the balance goes unpaid, causing further damage to your score. It can appear as 30 days late, then 60 and so on until it's paid off. If you make no effort at all to pay the balance, the lender may turn the debt over to a collection agency and this will appear on your report, too.
As for the repossession, although it appears on your report, it should state that it was voluntary – you defaulted, but at least you were cooperative about it. This is a very minor distinction, but it might save a few points on your credit score or influence a future lender who looks at your report.
When you contact your lender, you’re not limited to just trying to work out a payment plan for any deficiency balance. You can try to get the lender to waive the deficiency entirely, taking the vehicle back in satisfaction in full of the loan. If you’re successful, you’ve at least saved your credit from the deficiency debt appearing on your report and affecting your score. Even if your lender doesn’t agree to erase the deficiency entirely, it might at least reduce the balance to make the deficiency more manageable to pay off.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.