If a borrower fails to make their car payments on time and the loan goes into default, the lender can legally take the vehicle back in a process known as repossession (in most states). But is there anything the borrower can do before it comes to that?
How a Voluntary Car Repo Works
For someone that that can't afford their car payments, there is something called a voluntary repossession, or voluntary surrender. This process involves returning the vehicle to the lender on the borrower's own accord.
One would think that going the voluntary route would be painless compared to a regular, involuntary repossession, but that's not the case. Unfortunately, voluntary repossession is similar to an involuntary one, making it only a slightly better option.
Let's start with the positives.
For starters, an involuntary repo can be an emotionally distressing experience. The lender could take the car at an inconvenient time, or do it in front of family or friends, which can be embarrassing. The borrower surrenders a car on their own terms, which can save them some anxiety.
A voluntary repo also means the borrower isn't on the hook for fees that would have resulted from the lender taking it on their own. It costs money for lenders to repossess vehicles and the borrower is liable for those costs, so it removes that expense from the mix.
Finally, surrendering the vehicle means they don't have a monthly car payment to make anymore. This may make it possible for the borrower to prevent any other obligations from becoming delinquent.
But the bad still outweighs the good where voluntary repossession is concerned.
A borrower is still responsible for paying the balance that remains after the lender sells the car and applies the proceeds to the loan, just like an involuntary repo.
Finally, just because the borrower gave up the car voluntarily doesn't mean their credit will be spared. The creditor will still report the voluntary repossession to the credit bureaus, and it is just as damaging to their credit scores as an involuntary repo.
At the end of the day, it will still appear on that person's credit reports and show future lenders that they failed to keep up with an obligation. Therefore, it's wise for borrowers to consider all other available options before surrendering their vehicle.
Other Options
Before considering a voluntary repossession, borrowers will be better off pursuing several alternatives, such as:
- Reviewing their budget to identify areas where they can reduce or eliminate expenses.
- Getting a part-time job for additional income.
- Selling the vehicle.
- Refinancing their loan.
But, when borrowers are having trouble making their car payments, the best course of action is to contact the lender and explain the situation as soon as possible. Lenders can be understanding, and if a borrower takes the time to explain their situation, a loan officer may be willing to discuss options.
In some cases, it may be possible to negotiate an extension, get a revised payment schedule, or enter into a deferment for a couple of months. Anything that can be done to prevent a repo, whether voluntary or not, should be pursued before it comes to that.
Financing After Repossession
Getting another car loan after you have been through a repossession can be difficult, but not impossible. You just need to work with the right dealership.
At CarsDirect, we have a nationwide network of car dealers that specialize in helping people with imperfect credit get financed. We can connect you with one in your local area, but only if you start the process by completing our free and easy online auto loan request.