How Voluntary Repossession Affects Your Credit
Voluntary repossession is when someone surrenders their vehicle in order to avoid having it taken from them after falling behind on the payments for an auto loan or lease. It basically amounts to a last-ditch effort to earn leniency from creditors, debt collectors and the major credit bureaus. By saving the collecting party the effort of having to locate and repossess a vehicle, the thinking goes, the debtor might curry some valuable favor – perhaps in the form of forgiven interest charges, more favorable status reports sent to the credit bureaus, or better odds of credit approval in the future. But that thinking is flawed.
While voluntary repossession may provide some modest benefits in certain situations, it won’t do much to help your credit. By the time vehicle repossession becomes a real possibility, the bulk of the credit damage will already have been done, thanks to numerous missed payments and the fact that repossession doesn’t happen in a vacuum, to people in otherwise perfect financial shape. That means other derogatory marks on your credit report are also likely to limit any potential benefit of voluntary repossession.
What’s more, whether you surrender your vehicle voluntarily or it’s repossessed from you, the lender will sell it to help recoup what you owe. If the value of the vehicle is insufficient, you will owe a “deficiency balance,” which will be listed on your credit report and continue to damage your standing. The lender might also send your account to collections or file a lawsuit at this point, either of which would further harm your credit.
Given that it makes little, if any, difference whether the repossession on your credit report has the word “voluntary” in front of it, rushing to hand over your ride is never a good idea. You should instead strategically use the time that you have left to either come up with the money needed to bring your account into good standing or negotiate a settlement with your creditor. Such an agreement might very well include a form of voluntary repossession, but at least you’ll be certain of what you’re getting out of the transaction.
Read on to learn why voluntary repossession isn’t the answer and what alternatives to explore.
Voluntary Repo Alternatives
Voluntary repossession is a losing proposition, not only because it’s unlikely to provide any tangible benefit to your credit score or wallet, but also because it might mean sacrificing your ride to work –jeopardizing your ability to pay other bills. Plus, you likely have better options that have yet to be exhausted. It’s not like repossession will really catch you by surprise, either, considering that most states require lenders to provide a final notice and opportunity to repay amounts owed before reclaiming a vehicle.
You should therefore use the time that you have to try to secure a favorable outcome in writing, rather than simply hoping you’ll get off relatively easy. More specifically, see if any of the following options apply to your situation:
Negotiate A Better Deal: Communicating with your creditor can be just as beneficial as voluntary repossession, showing that you are committed to living up to your obligation, perhaps just not in its current form. So give the lender a call, explain your situation, and express your desire to work out a payment arrangement. But don’t agree to anything right away.
You first need to review your finances to determine exactly what you can afford, as the consequences of welching on a revised payment plan can be severe. Furthermore, you must get your new agreement in writing. This should include your required monthly payments, your creditor’s promise to delay repossession (provided that you abide by the new terms), and the classification of your account (e.g., “current” or “past due”) on your credit report. If your creditor can agree to report your account as current, that will go a long way in helping your credit score.
Find the Best Price on Your Own: You won’t be able to sell the vehicle behind your creditor’s back because your creditor will still be the title holder. But since it’s fair to assume that a lender isn’t going to bend over backward to secure the best possible resale price, it’s worth doing a bit of research to see what you could get from a private buyer. If you find someone willing to buy the vehicle for well above its Kelley Blue Book value, you can bring the opportunity to the lender and explain why it benefits all involved.
This isn’t guaranteed to work, but at least the research will help you determine whether the creditor obtains fair market value for your vehicle in the event of repossession.
- Explore Debt Consolidation: If a delinquent auto loan is your biggest financial problem and you still have a solid credit score (i.e. 660 or better), then debt consolidation could be the answer – at least in the short term. For example, many credit cards allow balance transfers from auto loans, basically enabling you to get square with the lender, get your vehicle’s title and repay your now-unsecured balance under more favorable terms – perhaps even 0% for an extended period of time. But that requires getting approved for a credit card with a high enough limit and attractive enough terms to make the strategy possible.
Voluntary Repo Consequences
A voluntary repossession will likely cause your credit score to drop by at least 100 points. This point drop is due to a couple of factors: the late payments that cause the repo and the collection account that is likely to result from it. You can estimate a repossession’s effect on your credit score by using our credit score simulator for late payments and collections.
Point Drop Due to Late Payments
Repossession ultimately occurs because you fell behind on your car payments at some point. These late payments cause the first dip in your credit score, which can be as much as 100+ points, although it varies based on the shape of your credit score before the late payment.
Point Drop Due to Collections
Once your car is repossessed, there’s more damage to be done. Your car will be sold in an auction to recoup some of the money lost. Whatever difference remains between your loan amount and the auction price is yours to repay. Inevitably, this amount will be sent to collections. When the collection account is recorded on your credit report, it can also cause a drop of around 50 to 100 points.
Extended Stay on Credit Report
When your creditor reports your vehicle’s voluntary repossession to the credit bureaus, your loan account (most likely in collections) will be updated with a code to note the repossession as the manner of payment. As a result, the voluntary repossession will stay on your credit report for 7 years, starting on the date when your delinquency is reported to the credit bureaus.
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