If someone chooses a voluntary repo or the bank repossesses your car, your credit will be negatively impacted either way. A voluntary repossession is when you fall behind on your car payments and arrange with the lender to give the car back to the bank. If you find yourself facing this type of a decision, there are a couple advantages to a voluntary repossession over having your vehicle seized in the middle of the night.
Whether the bank issues the repossession or it is a voluntary repo, the negative mark stays on your credit score for seven years, lowering your FICO score and making it more difficult to purchase another vehicle.
This will be considered under the “payment history” portion of your FICO credit score which represents approximately 35% of your score.
Most state laws allow the lender to repossess your car any time you fall behind on the payments. The average past due time-frame is 60 days before repossession, however it could happen as soon as the payment falls behind just one payment. The lender has the right to come onto your personal property to seize the vehicle.
When a car comes back to the lender, whether it was a voluntary repo or the bank initiated it, the bank will sell the vehicle. If there is a difference between the balance of the loan and what they receive for the car, you are liable and responsible for the difference.
The bank will either turn that amount over to a collection agency or legally sue you for the balance. Now, either the collection or legal action will show up on your credit report, further lowering your FICO score.
One advantage to the voluntary repo is that you could avoid some of the costs associated with the involuntary repo. If the bank orders the repossession, the lender can charge you the expense it cost them to have a company come and get the vehicle from your property.
In addition, because the bank could repossess your car unannounced, a voluntary repossession gives you the time to remove any personal possessions such as a GPS device, CD’s, car seats, etc.
There are a couple options you could try before a voluntary repo to help reduce the damage to your credit report.
Contact your bank, be honest with them and see if they will work with you. Some lenders will change the due date to accommodate your paycheck. Some will defer a payment to the end of the loan.
Try selling the vehicle yourself. Use the money received to pay off the loan.
Try to refinance the vehicle, lowering the monthly payment amount.
If you have given your best effort and you think repossession is the only option you have, doing a voluntary repo could save you a little cash.