Should you give your car back to avoid debt?
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Growing up, we saw a few cars repossessed. As a child, it was difficult to understand why my parents let someone take their car. The car payments were becoming unmanageable at times, and voluntary repossession became the only solution. The process is not easy and there are many financial implications. You should be able to make an informed choice if you are considering voluntary repossession. Here’s what you need to know.
What Is Voluntary Repossession?
Voluntary repossession involves returning your car to the lender when you can no longer keep up with payments. You can avoid the worst of the consequences by surrendering the car to the lender rather than waiting for them to take it. The process involves contacting your lender and signing the vehicle over. It may seem like a responsible thing to do, but it does not erase the debt or financial impact. The lender will still sell the car, and you’re responsible for any remaining balance if the sale doesn’t cover your loan.
How Does Voluntary Repossession Affect Your Credit?
Opting for a voluntary repossession impacts your credit score significantly, much like a traditional repossession. The credit score is affected by a voluntary repossession, which can last up to seven-years. Credit scores can be affected by 50 to 150 credit points depending on the previous credit rating. This can affect your ability to secure mortgages, car loans or even rental agreements. This can affect your ability to secure mortgages, car loans, or even rental agreements.
Will You Still Owe Money After Voluntary Repossession?
Surrendering your car doesn’t automatically erase your auto loan debt. Lenders apply the proceeds from the sale of the car to the outstanding balance. You are responsible for any difference if the sale does not cover the amount you owe. This is known as the deficiency. The remaining debt may lead to legal action or collection efforts. Some lenders may negotiate a settlement or payment plan for the deficiency balance, but that’s not guaranteed.
Are There Alternatives to Voluntary Repossession?
Before surrendering your car, exploring alternatives might save you from financial and credit damage. You can refinance your loan, negotiate a deferment of payments, or trade down to a cheaper vehicle. You can also sell the car privately to cover your loan more effectively than a repossession sale. Selling the car privately could also help you cover the loan more effectively than a repossession sale.
Can You Rebuild Your Credit After Voluntary Repossession?
Rebuilding credit after a voluntary repossession is possible but requires time and effort. You can improve your credit score by starting with a secured card and paying on time. Diversifying your mix of credit with small personal loan can also demonstrate responsible use of credit. Monitoring your credit report for errors and disputing inaccuracies is another crucial step.
When Does Voluntary Repossession Make Sense?
Voluntary repossession might be a reasonable option if keeping the car would cause deeper financial strain. This is a much better option than defaulting and not communicating, which can lead to repossessions and extra fees. Surrendering your car could help you stop the debt from escalating if your loan balance is significantly higher than its value. For those who cannot refinance or sell privately, it can offer a controlled exit strategy.
Is Voluntary Repossession Worth It?
Ultimately, the decision as to whether or not voluntary repossession is a good idea is up to you. It’s not the first option you should consider. It should only be used as a last resort. This can have a negative impact on your credit score, which will make your life harder for many years. It’s also unlikely to eliminate your debt completely. If you decide to take this route, plan to pay off the balance of your credit card and to repair your credit. It’s all about what you think is the best option for you, and whether you can recover from the credit hit. Weigh your options carefully.
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