When you can’t afford your car anymore and are in danger of losing it to repossession, you can do voluntary repossession or voluntary surrender, giving the vehicle back to the lender before it’s taken.
Your credit will still take a hit, but it may be slightly smaller than with involuntary repossession — and you may avoid some fees associated with involuntary repossession.
How voluntary repossession works
Voluntarily surrendering a car involves informing your lender that you can no longer make payments and intend to return it. Arrange the time and place, and keep records of when, where and with whom you dropped it off.
That doesn’t mean you’re done paying, though, because there isn't a way to return a financed car without penalty.
The creditor will resell the vehicle, and you’ll receive a statement with the details of the sale. Just as with involuntary repossession, you have to pay the difference between what the car sold for and what you owed on the loan, or the “deficiency balance.” You also might still have to pay fees associated with the car loan, such as late payment charges.
If you don’t pay, your lender can turn the remaining balance over to a collection agency. Adding a collection account to your credit reports will make the credit damage from the repossession worse.
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How voluntary repossession affects your credit and finances
Voluntary surrender and repossession are loan defaults, which stay on your credit reports for seven years. That type of negative mark will harm your scores, especially your automotive-specific credit scores. The next time you apply for a car loan, you’ll likely be deemed high risk and charged high interest.
Although a voluntary surrender is noted on your credit reports, a lender that looks closely will see that you took a proactive approach to resolving the account.
If you have to pay a deficiency balance, know the best ways to handle your debt and what to do if it ends up in collections.
While you do have to wait for a voluntary repossession to fade from your credit report, here are some ways to restore your credit:
Pay your bills and existing lines of credit on time. It’s OK if you can pay only the minimum payment amount.
Keep your credit card balances low.
Pay down your other debts as much as possible.
How to avoid voluntary repossession
If you're struggling to make your car payments, there may be alternatives to voluntary repossession. Here are some other options:
Talk to your lender. Check to see whether you qualify for options that would allow you to keep your car, like a repayment plan or more time to make a payment. Ideally, you’ll want to do this before you fall too far behind on payments.
Transfer your car loan payments. It may be possible to have someone else, like a parent, assume responsibility for your car by transferring the loan to them. This way, you can still use the car and pay your parents (or another person) back over time. Be sure to contact your lender first to see if this approach is allowed.
Refinance your car loan. If you have good credit, you may be able to refinance your car loan to lower the interest rate, which could reduce payments and make them more affordable.
Sell your car. Used-car prices have been high since early in the COVID-19 pandemic, so you may be able to sell your car and get enough to cover your loan in full. You may even have money left to put toward a less expensive car.
When voluntary repossession makes sense
A voluntary repossession makes sense when you know your car payments are unaffordable, an involuntary repossession seems inevitable and other options won't work for you.
Opting for a voluntary surrender of your vehicle can help you avoid the more expensive fees imposed during an involuntary repossession, like towing and storage fees.
Making arrangements to return your car can save you anxiety because you won’t have to wonder when and where a repo team will pop up to take your car.
