Voluntary surrender is a fancy way of saying you're giving your car back to the lender before they take it from you. Instead of having your vehicle repossessed, you're choosing to return it. This action can have both immediate and long-term implications for your financial situation. By surrendering the car, you are still responsible for any outstanding balance on the loan after the lender sells the vehicle, and not paying on the loan can lower your credit score. This can make it more challenging to secure loans or credit in the future. So, it's essential to consider these consequences before deciding to surrender your car.
Voluntary Surrender of Your Car: What to Expect
Financial Impact of Voluntary Surrender
Negative Impact on Your Credit
The Voluntary Surrender Process
Voluntary Surrender Vs. Repossession
Alternatives to Voluntary Surrender
Financial Impact of Voluntary Surrender
When you surrender the car, the lender will attempt to sell it at auction. You're in the clear if the sale proceeds cover the entire loan balance. However, if the sale price is less than you owe, you will still be responsible for the difference, known as a deficiency (outstanding) balance.
Debt Recovery: After the sale is complete, the lender may take steps to recover the deficiency balance (debt). You will not be able to pay the balance of the loan.
The lender can:
Assign your account to a collections agency to recover the remaining balance.
Obtaining a court judgment against you by initiating a lawsuit.
Garnish your wages for the deficiency if they win the lawsuit.
Negative Impact on Credit
Both voluntary surrender and repossession will negatively impact your credit score. However, voluntary surrender is generally seen as less damaging. When you surrender your car, any missed payments before the surrender will be reported as late or missed payments on your credit report, and the account will be reported as "closed by repossession," which negatively impacts your credit.
The voluntary surrender will also shorten your credit history because the account will be closed prematurely.
If the funds from the auction do not cover the outstanding loan balance, a situation may arise where the remaining amount owed becomes a new debt. When you're already stretched thin financially, new debt can further strain your financial situation and make it even harder to obtain other loans, credit cards, or even housing in the future.
The Voluntary Surrender Process
Here's a general outline of what to expect if you voluntarily surrender your vehicle.
Vehicle Recovery:Â Contact the lender, and they will give you instructions on where and when to drop off the car. You'll need to return all the keys and any other items that belong to the vehicle.
Vehicle Preparation:Â The lender will prepare the car for sale, which may include cleaning, repairs, and any necessary paperwork.
Auctioning the Vehicle:Â The car will be sold at a public or private auction.
Debt Settlement:Â The proceeds from the car sale will be applied to your loan balance.
If the sale proceeds cover the entire loan balance, you're done with the loan, but you may have to pay a few fees.
You'll owe the deficiency if the sale proceeds don't cover the entire loan balance.
Voluntary Surrender vs. Repossession
Although opting for voluntary surrender may appear preferable, it is crucial to thoroughly consider the advantages and disadvantages. Repossession of your vehicle can lead to even more serious repercussions, and both choices involve the possibility of legal action.
Voluntary Surrender
Less severe credit impact:Â It's generally considered less damaging to your credit than a repossession because it shows you are cooperating with the lender.
Potential fees:Â Lower fees than with repossession.
Deficiency balance:Â You may still owe a balance after the auction.
Avoidance of repossession:Â Prevents the embarrassment and inconvenience of a forced repossession.
Repossession
Negative credit impact:Â Results in a more severe and lasting impact on your credit score.
Potential fees: You might be responsible for towing, storage, and auction fees.
Embarrassment and inconvenience:Â The repossession process can be public and stressful.
Alternatives to Voluntary Repossession
Before considering voluntary surrender of your car, consider talking to your lender, selling the car on your own, and even seeking professional guidance to minimize the impact on your finances and credit.
You can attempt to negotiate with the lender to discuss your situation. They may be willing to offer a temporary payment plan, modify the loan terms, or accept a car return without reporting it to credit bureaus. You can also attempt to sell the car yourself. If you can sell the car for more than you owe, you can pay off the loan and avoid negatively impacting your credit. If you need a new car, you can trade in your old one for a down payment on a new loan.
Seeking financial advice or consulting with a credit counselor can help you navigate the best course of action for your specific situation.