Voluntary Repossession: What It Is and How It Works
Voluntary repossession is when you return a car you can’t afford to the lender. Before making a decision that will hurt your credit score, learn more about your options.
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When you can’t afford your car anymore and are in danger of losing it to repossession, you can give the vehicle back to the lender before it’s taken. This is called a voluntary surrender or voluntary repossession.
Voluntary surrender is a direct alternative to involuntary repossession, when a car can be taken without warning, at any time and place, causing emotional distress and potentially leaving you and loved ones stranded. In many states, a lender can repossess your car as soon as your payment is late.
A voluntary surrender makes sense when you know your car payments are unaffordable and other options won't work for you.
With both types of repossession, your credit will take a hit, but it may be slightly smaller with voluntary repossession — and handing your car over on your own terms may help you avoid some fees and embarrassment.
» Learn how to lower your car payment
How does voluntary repossession work?
Voluntarily surrendering a car involves informing your lender that you can no longer make payments and intend to return it. Empty your car of all personal items and arrange the time and place to drop off your car and hand over the keys. Keep records of when, where and with whom you dropped your car off in case your lender asks for these details in the future.
Your financial responsibility doesn’t end there, however, because there isn't a way to return a financed car without penalty.
In this case, the creditor will resell the vehicle, and you’ll receive a statement with the details of the sale. Just as with involuntary repossession, you have to pay the difference between what the car sold for and what you owed on the loan, or the “deficiency balance.” For example, if you owe $10,000 on your car and the lender sells it for $7,000, you must pay the $3,000 difference. You also might still have to pay fees associated with the car loan, such as late payment charges.
» Know your rights when it comes to car repossession
Advantages of voluntary repossession
If you can’t make your car payments, there are some clear advantages to voluntary surrender compared with involuntary repossession:
You can avoid some of the penalties and fees imposed during an involuntary surrender, like towing and storage fees.
A lender might look more fondly on you in the future because you took a proactive approach to resolving the account.
You can control the conditions of the surrender. Handing over your car at a date and time of your choosing is not only more convenient but also spares you of the stress and inconvenience of an involuntary surrender.
Does voluntary repossession hurt your credit?
Voluntary surrender counts as a derogatory or negative mark and will stay on your credit reports for up to seven years. This stain on your credit reports might prevent you from being approved for new credit and your terms, like interest rates, will likely be higher.
When it comes to your credit score, repossession of any kind is detrimental — but exactly how dramatic depends on the prior state of your credit. The higher your score, the bigger drop you’re likely to see.
» Learn more about how repossession affects your credit
How voluntary repossession affects your finances
A voluntary surrender will have a lasting impact on your overall financial health.
You might still owe the lender money in the form of a deficiency balance. You’ll want to pay off that balance in a timely manner so it doesn’t go into collections.
Your lender can report an unpaid deficiency balance to collections. Adding a collection account to your credit reports will make the credit damage from the repossession worse.
Your ability to get credit in the future will be more challenging. For example, the next time you apply for a car loan, you’ll likely be deemed high risk and charged high interest.
» Learn more about how collections accounts affect your credit
How to avoid voluntary repossession
If you're struggling to make your car payments, there may be alternatives to voluntary repossession:
Talk to your lender. Check to see whether you qualify for options that would allow you to keep your car, like a repayment plan or more time to make a payment. Ideally, you’ll want to do this before you fall too far behind on payments.
See if you qualify for an auto loan hardship program. Job loss, divorce, a medical emergency and other types of financial burdens could qualify you for a hardship program. Not all lenders offer them, but it’s worth looking into.
Transfer your car loan payments. It may be possible to have someone else you trust, like a parent, assume responsibility for your car by transferring the loan to them. This way, you can still use the car and pay your parents (or another person) back over time. Be sure to contact your lender first to see if this approach is allowed.
Refinance your car loan. If you have good credit, you may be able to refinance your car loan to lower the interest rate, which could reduce payments and make them more affordable. You can learn more about how to refinance your car loan in six steps using our guide.
Sell your car. You may be able to sell your car and get enough to cover your loan in full. You may even have money left to put toward a less expensive car.
» Ready to refinance your car loan? Get the best rates
How to rebuild your credit after voluntary repossession
While waiting for a voluntary repossession to age off your credit report, here are some ways to restore your credit:
Pay your bills and existing lines of credit on time. Strive to pay more than the minimum payment to avoid accruing debt and paying unwanted interest.
Keep your credit card balances low. When you use 30% or less of your credit limits, that helps keep your credit utilization low, which can elevate your score.
Pay down your other debts as much as possible. Not all debt is “good debt,” and freeing up the money that goes toward existing debts can give you breathing room in your budget.
Consider credit building alternatives. Sign up for a rent reporting service or a program like Experian Boost, where your on-time utility and streaming service payments can give your credit an extra bump.
» More ideas for how to build credit
