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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What is voluntary repossession?
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, potentially causing emotional distress and leaving you and loved ones stranded.
In many states, a lender can repossess your car as soon as your payment is late.
If making your car payments has become unmanageable, voluntary surrender may be a better alternative to having the car involuntarily repossessed. It's a difficult choice, but options are available to support your decision.
» Know your rights when it comes to car repossession
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.
The creditor will resell the vehicle, and you’ll receive a statement with the details of the sale.
You will 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.
Pros and cons of voluntary repossession
Pros
Avoid some of the penalties and fees imposed during an involuntary surrender, like towing and storage fees.
A lender might look more favorably on you in the future because you took a proactive approach to resolving the account.
You can control the conditions of the surrender.
Cons
Voluntary repossession is a derogatory mark that will stay on your credit reports for up to seven years.
You might still owe the lender money in the form of a deficiency balance. Try to pay off that balance quickly so it doesn't go into collections.
Your lender can report an unpaid deficiency balance to collections, worsening the credit damage.
Your ability to get credit in the future will be more challenging.
Does voluntary repossession hurt your credit?
Both voluntary surrender and involuntary repossession pose harm to your credit score, but the former may give you more control of your situation.
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 probably be higher.
When it comes to your credit score, repossession of any kind is detrimental — but exactly how dramatic depends on the state of your credit. The higher your score, the bigger drop you’re likely to see.
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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’d do this before you fall behind on payments.
See if you qualify for relief
Job loss, divorce, a medical emergency and other types of financial burdens could qualify you for an auto loan 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 the 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 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.
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 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.
Can you get another car after a voluntary repossession?
Yes, but it will be more challenging, especially in the short term. Credit score damage from the voluntary repossession might mean fewer financing options because many lenders will see you as risky.
Giving your credit time to rebound and working on building it up through on-time payments and lowering your debt will give you a better chance at another car.
Some alternatives can get you in a car faster. Ask a trusted person with strong credit to be a co-signor on your next auto loan. Buying a used car with cash could also help you avoid unfavorable loan terms and rates while still getting you the transportation you need.
» Learn more about how to build credit
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