If you’re struggling to make your car payments and are considering voluntarily surrendering your vehicle to the lender, you may be wondering how it will impact your credit score. The simple answer is yes, a voluntary repossession will negatively affect your credit, though perhaps not as severely as an involuntary repossession. However, the long-term consequences can still be significant.
Understanding Voluntary Repossession
Voluntary repossession, also known as a voluntary surrender, occurs when a borrower proactively returns their vehicle to the lender because they can no longer afford the payments. This is different from an involuntary repossession, where the lender takes the vehicle without the borrower’s consent, often without warning.
With a voluntary repossession, the borrower contacts the lender, explains their situation, and arranges a time to turn over the vehicle. This can be less stressful and embarrassing than having the car taken from them unexpectedly. Additionally, the borrower may avoid certain fees associated with an involuntary repossession, such as towing charges.
However, it’s important to note that a voluntary repossession is still considered a loan default and will be reported as such to the credit bureaus. The lender will then sell the vehicle at auction and apply the proceeds to the outstanding loan balance. If the sale price is less than what the borrower owes, they may still be responsible for the deficiency balance.
Impact on Credit Score
A voluntary repossession can significantly impact a borrower’s credit score, typically causing a drop of 50-150 points or more. The exact impact will depend on the individual’s credit history and other factors.
For example, if the borrower has a long history of on-time payments and a high credit score, a voluntary repossession may cause a more dramatic drop. On the other hand, if the borrower already has a low credit score due to other negative items, the impact of a voluntary repossession may be less severe.
It’s also important to note that a voluntary repossession will remain on the borrower’s credit report for up to seven years, just like an involuntary repossession. This can make it difficult to obtain credit in the future, such as for a car loan, mortgage, or credit card.
Alternatives to Consider
Before deciding to voluntarily surrender a vehicle, it’s important to explore other options that may help the borrower avoid defaulting on their loan:
- Negotiate with the lender: Borrowers should contact their lender as soon as they realize they may have trouble making payments. The lender may be willing to work with them on a modified payment plan, temporary deferment, or other solution that allows them to keep the vehicle.
- Sell the vehicle privately: If the borrower is able to sell the vehicle for more than the outstanding loan balance, they can use the proceeds to pay off the loan and avoid a repossession altogether.
- Refinance the loan: If the borrower’s financial situation has improved since they originally obtained the loan, they may be able to refinance at a lower interest rate or with a longer term, making the payments more manageable.
- File for bankruptcy: In some cases, filing for bankruptcy may be an option to help the borrower get their finances back on track and potentially keep their vehicle.
It’s always best to explore these alternatives before resorting to a voluntary repossession, as the long-term impact on a credit score can be significant.
Rebuilding Credit After a Voluntary Repossession
If a borrower has already undergone a voluntary repossession, there are steps they can take to rebuild their credit over time:
- Pay off any remaining loan balance: If the borrower still owes money on the loan after the vehicle is sold, they should prioritize paying off that balance as soon as possible. This will prevent the debt from going to collections and further damaging their credit.
- Make payments on time: Payment history is the most important factor in determining a credit score. By making all other payments on time, such as credit card bills and utility payments, the borrower can start to rebuild their credit.
- Keep credit card balances low: Credit utilization, or the amount of available credit being used, is another important factor in credit scores. Borrowers should aim to keep their credit card balances low, ideally below 30% of their total available credit.
- Monitor credit reports: Borrowers should regularly check their credit reports for errors or inaccuracies and dispute any incorrect information with the credit bureaus. This can help improve their credit score over time.
While a voluntary repossession can be a setback, it doesn’t have to be the end of the road for a borrower’s credit. By taking proactive steps to rebuild their credit and make wise financial decisions going forward, they can eventually recover and achieve a good credit score once again.
In conclusion, a voluntary repossession can have a significant and long-lasting impact on a borrower’s credit score. While it may be preferable to an involuntary repossession in some ways, the consequences can still be severe. Before deciding to voluntarily surrender a vehicle, borrowers should carefully consider their options and explore alternatives that may help them avoid defaulting on their loan. If a voluntary repossession does occur, borrowers should take steps to pay off any remaining balance, make payments on time, and monitor their credit reports to rebuild their credit over time.