Voluntary Surrender or Repossession: Which is Better for Your Credit Score?

If you fall behind on your auto loan payments because of a lost job, unexpected medical expenses, or simply not enough income, you may consider voluntary surrender of your vehicle. But what that means, and how it affects your credit score compared to repossession can be something of a mystery. Here are some things to consider.

What is Voluntary Surrender?

Whenever you fall behind on your auto loan payments, you are technically in default of your contract and at risk for repossession. Most loan agreements say that the creditor may take possession of the vehicle if the terms of the contract are not met. While some banks will give you 60 or even 90 days to catch up and pay off your balance, they are not legally required to do so. Once you fall behind, the lender has the legal right to collect your vehicle.

That doesn’t mean you have to live in fear of the repo-man. If your bank, loan company, or credit union offers voluntary surrender, you can arrange a time and place to drop off the vehicle and sign over title to the lender. By voluntarily surrendering your vehicle you are admitting that you will not be able to pay the debt on time, but doing so may have certain advantages.

Is Voluntary Surrender Better than Repossession?

Voluntary surrender is not very different from repossession, legally speaking. In both cases, your vehicle will be sold at auction and you will still be responsible for any amount owed beyond the sale price – the “deficiency balance”. You may also still have to pay interest or late fees connected with the loan itself.

Still, voluntary surrender can be a better option for some borrowers than repossession, even if only for practical reasons. Also called voluntary repossession, it allows you to control when and where the lender takes back the vehicle. This can eliminate stress and give you peace of mind about the process. It may also give you an opportunity to make certain inexpensive repairs that will cause the vehicle to bring in a higher price at auction. 

How Can You Fix Your Credit Score After Voluntary Surrender or Repossession?

Both repossession and voluntary surrender show up as loan defaults on your credit report. They will negatively affect your credit score for 7 years. That means you could end up paying higher interest on your next car loan because the lender will consider you “high risk”. It could also affect the rates you receive on mortgages and credit cards, or even your ability to be approved for a lease. 

However, if you agree to a voluntary surrender of your vehicle, that will be noted on your credit report. If a lender looks closely, it can help reduce the effect of a lower score. To make this more likely, you should draw your loan officer’s attention to the voluntary surrender early in the process. In some circumstances, an explanatory letter may also help.

The best way to limit the effect of a voluntary surrender on your credit score is to build up your credit around it. By restoring your credit through consolidation, on-time payments, and being smart with your debt, you can make the voluntary surrender or repossession seem more like an isolated incident or a bad experience in your past, rather than a signal of future trouble to come.

No one wants to lose possession of a car. But when collections companies are calling, it can sometimes be a better alternative to repossession. Paired with a strategy to stop collections harassment and pay down your debt, it can get you back to stable financial ground.

Dani K. Liblang is a collections harassment attorney at The Liblang Law Firm, PC, in Birmingham, Michigan. She helps consumers resolve outstanding collections lawsuits. If you are considering voluntary surrender to stop the creditor calls, contact The Liblang Law Firm for a free consultation.