How Does Letting a Luxury Item Go Back to the Bank Affect Credit Rating?

Letting an Item Go Back to the Bank

When a borrower cannot continue to make payments on a loan for anything, including a luxury item, the lender may allow the borrower to voluntarily turn over the item to the bank. The lender will generally do this to avoid the costs involved in repossessing the item, such as legal fees and, if necessary, hiring someone to repossess the item. Turning an item over to the bank is known as a "voluntary surrender" or "voluntary repossession". When done strictly by the book, the bank will sell the item, usually at an auction, and apply the amount received to the loan minus any costs and expenses. If the amount received covers the balance of the loan, then the process is over. If the amount does not cover the balance of the loan, then the borrower is responsible for the remaining amount. If the borrower pays this amount, then the process is over. If not, then the bank can start other legal action.

Credit Rating

A credit rating is based upon a credit report. A credit report is a log of all financial accounts that are reported to a credit bureau by the financial institution holding the account. The data in such a report include things like the current balance of the account, the monthly payment required, the monthly payment made and, most importantly, the timeliness in which payments are made. These reports also include the status of all accounts. This status tells if the account is currently open and, if not, the final status of the account when it was closed.

Effect On Credit Rating

Because a credit report depends 100 percent on what information the financial institution voluntarily reports to the credit bureau, there can be some wiggle room in how turning an item back over to the bank will affect a credit rating. The lender can report that the item was repossessed. A voluntary repossession is still a repossession. This will have a large negative impact on a credit rating. The lender can also simply report the account as closed with no comment. This will not impact the credit rating at all, although all of the history of the account up to that point, including any previously missed payments, will affect the credit rating. How the lender handles the situation depends largely on how large of a loss the lender takes and how much benefit the lender gets from the voluntary surrender. It may be possible to get the lender to agree not to report the surrender or repossession as a condition of voluntarily turning over the item.