Voluntarily Returning Your Car To Creditors

The Impact of a Voluntary Vehicle Surrender

Voluntarily surrendering your vehicle may be slightly better than having it repossessed. Unfortunately, both are very negative and will have a serious impact on your credit scores.

Voluntary Surrender VS. Repossession

Surrendering your vehicle and repossession are very similar in financial terms. You are unable to make the loan payments, so the lender is taking the vehicle back. It will be sold to recoup as much of the debt you owe as possible.

The emotional difference between the two can be day and night — literally. When you surrender the vehicle, you return it to the lender on much more positive emotional terms, usually during business hours. When a lender repossesses the vehicle, they may send someone in the middle of the night to take it while you sleep, which can be much more distressing for everyone involved.

By voluntarily returning the vehicle, you are taking some responsibility for the debt you owe. For this reason, lenders may consider a voluntary surrender to be slightly less negative than a repossession. You may also save money by avoiding the additional fees that often occur when a vehicle is repossessed, such as towing charges.

Be sure you completely understand the terms when you make the voluntary surrender. The lender will resell the vehicle, and the proceeds will go toward the balance you still owe on the loan. If there is still a balance remaining after the sale and you don't pay it, it could be turned over to a collection agency. This may result in a collection account being added to your credit history.

If the remaining balance is forgiven, that amount will likely be counted as additional income, which means you will have to pay taxes on it.

Voluntary Surrender on a Credit Report

When you voluntarily surrender the vehicle, your credit report will indicate that fact in the status of the account. It will be listed as a voluntary surrender and any remaining balance will continue to be reported. If the bank has to come take the vehicle, they will report the account as a repossession. That will be reflected on your credit report, as well.

Both are very negative, but a voluntary repossession may hurt your credit scores slightly less than a repossession.

How Do Voluntary Surrender and Repossession Differ?

While a voluntary surrender and a repossession are both considered negative as far as your credit is concerned, the impact of a voluntary surrender may be slightly less severe. Because a voluntary surrender means you worked with the lender to resolve the debt, future lenders may view it a little more favorably than a repossession when they review your credit history. However, the difference will likely be minimal in terms of your credit scores.

What Is a Voluntary Surrender?

When you finance a vehicle, the lender owns it until the loan is completely paid off. The vehicle is the collateral that secures the loan, and the lender has the right to take possession of it if you stop making payments.

A voluntary surrender occurs when you contact the lender on your own to let them know you can no longer make payments and make arrangements to give up the vehicle. You still lose the vehicle, but surrendering it voluntarily allows you to avoid the stress and potential embarrassment of a repossession.

What Is Repossession?

Repossession is when a lender takes your vehicle because you've stopped making payments on the loan the vehicle secures. In most cases, the lender has made several attempts at communication with the borrower to no avail.

Often, there are negative feelings on both sides, and the vehicle may be taken in the middle of the night or while the borrower is at work to avoid confrontation.

How Do Voluntary Surrenders and Repossessions Affect Credit?

The most important factor in credit scores is your payment history. Lenders determine the likelihood that you will make future payments on time, in part, by looking at how you have managed your credit accounts in the past.

Whether you return the car yourself or it's repossessed, it means you haven't repaid the debt as agreed. In the end, that is something lenders look at when determining the likelihood that you will repay your debts on time in the future, and it can hurt credit scores.

Is a Voluntary Surrender or Repossession the Better Option?

Although both voluntarily surrendering your vehicle and having your vehicle repossessed are considered derogatory, the benefit to a voluntary surrender is that it shows you were communicating and cooperating with your lender. By returning the car, you are taking responsibility for your financial issues and trying to work with the lender—rather than forcing it to take more drastic action.

You also avoid the uncomfortable situation of having a towing company come and remove your car from your home or place of employment. And, you may avoid owing additional fees, such as towing charges.

By working with your lender, you are also maintaining a more positive relationship. Because you aren't completely burning that bridge, the lender may be willing to extend credit to you much sooner after your financial challenges are resolved.

However, you still will be viewed as high risk and will likely pay a much higher interest rate, if you can get approved for a new loan at all.

How Can I Rebuild My Credit?

Rebuilding your credit scores after a voluntary surrender or repossession may take time, but you can start right away. Here are some tips to begin improving your credit:

• Bring current any other past-due accounts. If you are behind on any other accounts, bringing them current is the first step to rehabilitating your credit scores.
• Pay off any outstanding debts, such as collections or charge-offs. Even once your vehicle is back with the lender, there may be an outstanding balance after it is sold. Although an account with past-due payment history will still be considered negative, potential lenders may be more willing to extend credit in the future if they see that you've since made good on the debt.
• Make all your other payments on time. If you have other credit accounts, be sure that all payments on those accounts are made on time, every time. Your recent payment history matters the most. The longer ago your delinquencies were, the less impact they will have, and your more recent positive payment history will be reflected in your scores.