When a borrower gets behind on car payments and can no longer pay their auto loan, then they are at risk of defaulting on your loan. When this happens, the lender will repossess the vehicle. To do this, the lender sends a representative to take back the car at any time they choose. The car repossession process can be a stressful experience. But there is another option when you can no longer make your car payments, called voluntary repossession. In this article, we’ll cover what it is, how it works, and discuss the pros and cons.
What Is Voluntary Repossession?
Voluntary repossession is when a borrower can not meet their payment obligations for an auto loan, and makes arrangements with the lender to return the car. Instead of waiting for the lender to seize the car, voluntary repossession is something the borrower chooses proactively. As a borrower, this process may allow the borrower to avoid worse consequences of involuntary repossession– when the lender takes the car back after default.
How Does Voluntary Repossession Work?
In voluntary repossession, the borrower tells the lender they can no longer make the agreed payments on their car loan. Then, together they schedule a time and arrange a place for the borrower to return the car.
This process ends the buyer’s loan obligation but it doesn’t completely clear the borrower’s debt. After the lender has the vehicle in their possession, they will sell it at an auction. The borrower then also must pay any remaining loan balance if the sale doesn’t fully cover the unpaid portion of the loan debt – “the deficiency balance.”
Although both situations can happen when a borrower defaults on a car loan, the process of voluntary repossession is different from involuntary repossession. When repossession is initiated by the lender, they can take back the vehicle at any time, without any notice. Each state has different laws that pertain to car repossession. Check your state’s consumer protection agency guidelines on repossession to find out how the process works in your state.
Voluntary Repossession Without Late Payments
What if your car payments aren’t late, but you foresee that you won’t be able to keep paying your loan? Should you consider voluntary repossession?
The answer is it’s always preferable to pursue other avenues of negotiation before you resort to repossession. If your financial situation is temporary, the lender may be willing to renegotiate the payment plan. Another option is to sell the vehicle back to the lender privately. If there is a chance that you may be able to get back on track with car payments, avoiding repossession is the best.
Does Voluntary Repossession Hurt Your Credit?
Repossession always has a negative effect on your credit. A repossession of any kind typically stays on a credit report for seven years. It is hard to determine exactly how much damage this will do since each credit agency weighs factors differently. A lower credit score and a past repossession makes it harder to get approved for a loan in the future.
Pros and Cons of Voluntary Repossession
Pros
Even though no one wants to default on a car loan, if it happens, there are some pros to choosing voluntary repossession:
- As the borrower, you have control over the process. You have a say in when and where you will return the vehicle.
- Voluntary repossession may carry lower fees, compared to involuntary repossession, where the borrower is liable for towing and vehicle storage costs.
- Avoiding damage to the car can be another positive outcome. During an involuntary repossession process, damage can happen during the towing process. When you volunteer to return the car, you can make sure it remains in good condition, to cut down on additional expenses of repair.
Cons
- It impacts your credit score. Voluntary repossession carries negative consequences on your credit history. A repossession on your credit report can significantly lower your credit score.
- This affects your ability to get approved for future credit cards or loans. When you can’t meet the obligations of a car loan, a lender sees you as a risk. And if you are approved for a loan, you’ll likely pay higher interest rates.
- Though voluntary repossession is a choice you make with your lender, there can be legal consequences. It’s important to review your loan agreement and speak with a legal professional who can help you understand the consequences that apply in your case.
- Repossession stays on your credit report for seven years. This applies for any type of repossession, voluntary or involuntary, but it is still important to keep in mind.
Is Voluntary Repossession Right For You?
Overall, default and repossession is not a decision to take lightly. Before choosing this route, valuate your financial situation and consider alternative solutions to defaulting on the loan, such as negotiating with the lender, exploring refinancing options, or seeking other ways to be able to pay the loan. A debt counselor or financial professional can help you weigh the factors and decide if voluntary repossession is the best option in your case.