It’s natural to start looking for options when your car payment turns out to be a little harder to manage than you expected it to be. If you’ve already explored refinancing and have been denied, what is your recourse?
You might try to sell the car, but many people in your situation are upside down on their loans. This means the balance of the loan is higher than the worth of the car. This can make it impossible to find a buyer, because the car company will keep the vehicle until the entire balance of the loan gets paid off.
So you’re left with a car you can’t pay for, and are facing the prospect of a repossession no matter what you do. Should you just get it over with? Is it better to hand over the keys now, before someone comes to take them?
The Basics of Voluntary Repossession
Giving your car back to the finance company is called voluntary repossession. Sometimes it’s also called a voluntary surrender.
In many cases it can save you some money. For example, it lets you bring the car to a specified time and place so you can meet with the company’s agent, instead of forcing them to hire a tow truck. They also don’t have to pay the repossession agent. All of those fees typically get passed on to you in a normal repossession.
This still doesn’t make it your best option, but it’s admittedly a better option than an involuntary repossession.
From here, the process works exactly the same way a repossession does. The bank will sell the car and deduct the difference in the sale price from the balance you owe. You’ll then owe whatever the difference is.
If the difference is high, you could find yourself saddled with a large debt you still can’t pay. To add insult to injury, you don’t have a car anymore.
The Impact on Your Credit
The impact on your credit score will be exactly the same as it would be if you had simply held on to the car until the repossession agent showed up. The only difference is the repossession will be listed as voluntary.
This could show a future lender that you’re responsible and easy to work with, but only if they make a practice of reading credit reports instead of relying solely on the FICO score.
A Better Way
Bankruptcy can help you protect your vehicle from repossession in some cases. In a Chapter 7 bankruptcy your exemptions may cover the difference. In a Chapter 13, the automatic stay will protect your car so long as you’re paying off your loan.
Bankruptcy will even have a lesser impact on your credit. Credit scores often rise after bankruptcy discharge, and there are proven processes for rebuilding credit after bankruptcy. A repossession could hold you back for seven years. Bankruptcy, managed correctly, can become less relevant after two, even though it will still be on your report.
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