Growing up, we had a few of our cars get repossessed. It was hard as a kid to figure out why my parents would just let someone come and take our car. However, car payments became unmanageable for them at times and a voluntary repossession was the only option. It’s not an easy thing to do either, and it still comes with plenty of financial consequences. If you’re considering this as an option, you should understand the pros and cons of voluntary repossession so that you can make an informed decision. Here’s what you need to know.
What Is Voluntary Repossession?
Voluntary repossession involves returning your car to the lender when you can no longer keep up with payments. Instead of waiting for the lender to seize the vehicle, you surrender it willingly, aiming to minimize the fallout. This process requires contacting your lender to arrange a return and signing over the car. While it might seem responsible, it doesn’t erase your debt or the financial impact. The lender will still sell the car, and you’re responsible for any remaining balance if the sale doesn’t cover your loan.
How Does Voluntary Repossession Affect Your Credit?
Opting for a voluntary repossession impacts your credit score significantly, much like a traditional repossession. Once reported to credit bureaus, it stays on your credit report for up to seven years, lowering your score and making future loans harder to obtain. The credit hit can range from 50 to 150 points, depending on your previous credit standing. Additionally, potential lenders may view a voluntary repossession as a sign of financial instability. This can affect your ability to secure mortgages, car loans, or even rental agreements.
Will You Still Owe Money After Voluntary Repossession?
Surrendering your car doesn’t automatically erase your auto loan debt. After selling the vehicle, lenders apply the proceeds to your outstanding balance. If the sale doesn’t cover what you owe, you’re responsible for the difference, known as a deficiency balance. This remaining debt can lead to collection efforts or even legal action. Some lenders may negotiate a settlement or payment plan for the deficiency balance, but that’s not guaranteed.
Are There Alternatives to Voluntary Repossession?
Before surrendering your car, exploring alternatives might save you from financial and credit damage. Options include refinancing your loan, negotiating a payment deferment, or trading down to a less expensive vehicle. Some lenders offer hardship programs that can temporarily lower payments. Selling the car privately could also help you cover the loan more effectively than a repossession sale.
Can You Rebuild Your Credit After Voluntary Repossession?
Rebuilding credit after a voluntary repossession is possible but requires time and effort. Starting with a secured credit card and making on-time payments can help improve your score gradually. Diversifying your credit mix with small personal loans can also demonstrate responsible credit use. Monitoring your credit report for errors and disputing inaccuracies is another crucial step.
When Does Voluntary Repossession Make Sense?
Voluntary repossession might be a reasonable option if keeping the car would cause deeper financial strain. It’s a better choice than defaulting without communication, which leads to forced repossession and additional fees. If your loan balance significantly exceeds the car’s value, surrendering it could stop escalating debt. For those who cannot refinance or sell privately, it can offer a controlled exit strategy.
Is Voluntary Repossession Worth It?
Ultimately, the decision as to whether or not voluntary repossession is a good idea is up to you. That said, it shouldn’t be the first thing you consider. In fact, it should be a last-resort option. It can have a profound impact on your credit, making your life more difficult for years to come. Not to mention, it likely won’t get rid of your debt entirely. So, if you choose to go this route, be prepared to pay the deficiency balance and plan for credit repair. In the end, it is all about what will be the best move for you and whether or not you have the ability to recover from the credit hit. Weigh your options carefully.
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