You may be considering letting a car go back to the lender because you can no longer afford the payments. Here’s what you need to know to avoid ruining your credit.
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The car is returned to the dealership.
The first thing you need to do is call the lender and let them know you are going to be returning the car. This is important because if you don’t let them know and just stop making payments, it will look like you have abandoned the loan and it will show up as such on your credit report.
When you call, find out what their process is for returning a car. Some lenders will want you to bring the car back to them, while others may give you permission to take it back to the dealership. If you are given permission to take it back to the dealership, make sure you get this in writing.
Next, contact the dealership and let them know you will be bringing the car back. Many dealerships have special departments that handle these types of returns. Once again, make sure you get everything in writing before you move forward.
When you bring the car back to the dealership, they will inspect it and then give you a trade-in value for the vehicle. If there is any money left owing on the loan, they will apply this trade-in value towards that balance. However, if there is still money owing after they apply the trade-in value, you will be responsible for this amount.
If everything goes smoothly and there is no money owing on the loan after the trade-in value is applied, your credit report should reflect that the loan was paid off in full and closed with no balance outstanding.
You don’t make any more payments on the car.
What do you do when you can no longer afford your car payments? You may be tempted to just stop making payments and let the car go back, but that would be a mistake. Here’s what you need to do instead to protect your credit.
First, contact your lender as soon as you realize you can’t make your payments and explain the situation. The lender may be able to work out a new payment plan with you. If not, the lender will repossess the car.
Once the car is repossessed, it will be sold at auction. If the sale price doesn’t cover the balance of your loan, you’ll be responsible for paying the difference. This is called a deficiency judgment, and it will show up on your credit report as unpaid debt.
If you’re facing repossession, it’s better to try to sell the car yourself and pay off the loan balance. This is called a voluntary repossession, and it won’t have as big of an impact on your credit score as an involuntary repossession would.
The dealership sells the car and uses the money to pay off the loan.
If you can’t make your car payments or you’re otherwise unhappy with your vehicle, you may feel that your only recourse is to give the car back to the dealership. This process is called voluntary repossession, and it can negatively impact your credit scores for years to come.
Before you take this drastic step, however, it’s important to understand what will happen to your car and your credit. Voluntary repossession occurs when you return your vehicle to the lender because you can no longer make the required monthly payments. The lender then resells the car (called a “force sale”) and uses the proceeds to pay off the loan.
Voluntary repossession is different from involuntary repossession, which happens when the lender takes back your car without your consent. In most cases, involuntary repossession takes place after you’ve missed several payments and the lender has been unable to contact you.
Both voluntary and involuntary repossessions are reported to the credit bureaus, and both will damage your credit scores. However, a voluntary repossession may be seen as less negative than an involuntary one because it shows that you took action instead of simply allowing the lender to come and take your car.
If you’re struggling to make your car payments, there are other options available besides voluntary repossession. You may be able to renegotiate the terms of your loan with the lender or trade in your car for a less expensive model. You can also try to sell the car yourself before resorting to voluntary repossession.
Whatever option you choose, it’s important to avoid defaulting on your loan altogether. Defaulting on a loan not only damages your credit but also puts you at risk of having the vehicle involuntarily repossessed.
Your credit score is not affected by the car being returned.
The upside to voluntary surrender is that it won’t have an effect on your credit score. The account will be closed, but the car being returned won’t be reported as a negative item on your credit report.