If you have to default on your car loan, a dealership can agree to take back your car under a "voluntary repossession" --- if the dealer is the official creditor receiving your monthly payments. After you purchased the car, however, the dealer may have sold the loan to a bank or credit union. The bank or credit union may also agree to take the car back if you wish to default.
Significance
An automobile repossession is considered a negative credit event and likely will lower your credit score. Although you're volunteering to return the car, the dealership or creditor can still list it on your credit report as a repossession, according to the Federal Trade Commission (FTC). The repossession will remain on your credit report for seven years and make it difficult to obtain another auto loan, at least initially. The Bankrate website reports that the negative impact of an auto repossession will lessen over time. However, no one can say exactly how long a repossession will affect your credit or your ability to buy another car on credit.
Benefits
Arranging for a voluntary repossession can provide you with some peace of mind. You may not be able to afford the car because of a job loss or illness and have been struggling to make the payments.
Misconceptions
Giving the car back may not end your financial obligation. The FTC reports that the dealership or creditor could hold you responsible for a "deficiency" --- the difference between what you still owe on the car and what the dealership or creditor sells it for. Say you owe $12,000 on the loan. The dealer or creditor sells the car at auction for $10,500. That leaves a deficiency balance of $1,500, plus any other fees, such as a fee for early payoff of your financing. If you refuse to pay the difference, the dealer or creditor can file a lawsuit and possibly win a deficiency judgment, according to the FTC.
Considerations
Florida Attorney General Bill McCollum reported in 2010 that the dealer or creditor must act in a "commercially reasonable manner" when selling your car. McCollum reports that the car should not be sold for a price far below fair market value, leaving you with an unreasonable deficiency balance. Specific state laws may vary, but the FTC also reports that the dealer or creditor must act responsibly when selling your car. You should seek advice from an attorney if you feel you've been treated unfairly, the FTC advises.
Prevention/Solution
Sell the car instead of surrendering it through a voluntary repossession. The selling price must at least match the balance owed to the lender --- or you have to make up the difference with cash. Selling the car accomplishes your goal of getting rid of it, and by controlling the transaction, you can avoid a deficiency judgment and a repossession on your credit report.
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