For those who have a hard time making a car payment, one of the most common options to consider is voluntary repossession. However, before choosing this option, it is important for you to weigh the pros and cons of it. What are the pros and cons of voluntary repossession?
Definition of Voluntary Repossession
Voluntary repossession, which is also known as voluntary surrender, is defined as a process where a borrower who has failed to make several loan payments, who is only able to make late payments, or who is going into bankruptcy, takes a decision to return the asset to the lender before the lender filing a lawsuit asking the court to seize it or hire a third-party company to take it. The kind of asset in question can be a vehicle like a car, furniture, equipment, or other personal property. It is called a voluntary repossession because the act is voluntary or without any force.
Voluntary repossession is known to be an immediate alternative to repossession. In case you are not familiar with repossession, it is described as the situation when a vehicle is seized once the borrower is no longer able to pay the loan.
Pros of Voluntary Repossession
There are a few pros of voluntary repossession, including:
- In the case of voluntary repossession, you have the ability to control the situation more. Basically, you can decide when and where you return the asset, making it possible for you to prepare it beforehand, such as removing your personal items. It is different compared to repossession when the repo company hired by the lender can come to your place at any time and without prior notice to take your asset.
- By choosing this option, you are able to save your face in front of others because having your assets repossessed in front of others can be embarrassing and humiliating.
- If you choose voluntary repossession, you are able to avoid additional costs that are associated with involuntary repossession, such as storage fees, towing, and fees for repossession agents.
- Voluntary repossession can be a good option for a delinquent loan. With it, you are able to reduce future expenses when you are struggling financially.
- If you voluntarily repo your asset, your credit report will look better. According to one of the three main consumer credit bureaus called Experian, instead of repossession, your credit report will list voluntary surrender, making your credit look better. However, it is not guaranteed. Whether or not the repossession is reported depends on the lender and credit bureau. If you do not want it to be reported, you are suggested to contact your lender to ask them to not do it.
Cons of Voluntary Repossession
Aside from the pros, voluntary repossession also has several cons, such as:
- Voluntary repossession can hurt your credit because the report will not go anywhere for seven years as a derogatory mark. During this period, it may be harder for you to get approved for a new credit.
- Your ability to get future loans can be affected by voluntary repossession. In other words, it would be harder for you to get a loan in the future. Even if you voluntarily repo your asset, the credit will see it the same way as involuntary repossession. This one may be seen by the future lenders as a risk factor, making them hesitate to lend to you. Even if you get approval, the lender may hesitate to offer you higher interest rates.
- Your loan is not completely eliminated with voluntary repossession. If your asset is sold by the lender but the money does not equal the loan balance, there is still a deficiency balance that you will still have to pay. Aside from the remaining balance, you also should pay any fees, such as late-payment or repayment fees. Make sure to pay everything as soon as possible, unless it will go to collections and hurt your score more. In worse cases, you may be taken to court by the lender, resulting in your income being cut to pay back the remaining balance you owe.
Alternatives to Voluntary Repossession
If you think voluntary repossession is not the best choice, you may want to consider some of the following alternatives:
Alternative 1: Reach out to your lender
In case you are having a hard time making payments, it is better for you to contact your lender. Make sure to be honest to them by letting them know your real situation. After hearing everything from you, they may be kind enough to change your loan terms, making your payments more affordable. Besides, they may also want to change your payment schedule or allow you to make a delay payment. Once you agree about something, do not forget to write new loan terms in writing.
Alternative 2: Refinance your loan
Talk to your lender to see if it is possible for you to refinance your loan. Negotiate with them regarding your possibility of getting a lower interest rate and extending the repayment period. If they agree, you will be able to lower your monthly payments to an affordable amount. However, it is worth noting that a longer loan term means more interest that you will have to pay over time.
Alternative 3: Sell your asset
The best way to avoid voluntary repossession is to sell your asset. This one is recommended, especially if your asset costs more than your remaining loan balance. The money that you get from selling your asset can be used to pay off your loan. If there is still some left, you may still be able to get a new asset, a more affordable one.
Alternative 4: File for bankruptcy
There are a couple types of bankruptcy that you can consider, as follows:
- Chapter 7 bankruptcy: If you choose this type of bankruptcy, you will be allowed to give up your asset and discharge the loan and some other debts such as personal loans, credit cards, medical bills, judgements, older taxes, collections, and so on.
- Chapter 13 bankruptcy: This type of bankruptcy is recommended for those who want to keep the asset but are unable to make payments. By choosing this option, you will be allowed to rewrite the loan terms, making it possible for you to minimize the interest rate and extend the payment period.
Bottom Line
In conclusion, voluntary repossession can be a good option for anyone who is struggling to make their loan payments because it offers to reduce the stress and costs of involuntary repossession among the other advantages. However, it should be noted that it also has some disadvantages, such as it can negatively impact your credit score, it can make it harder for you to get a loan in the future, and so on. Before proceeding with voluntary repossession, you may want to consider some other options, such as refinancing, selling your asset, loan modification, and so on. In order to make a good decision, you are advised to consult it with a financial advisor or credit counselor.
