We’ve all been there: life throws some financial curveballs, and suddenly, managing all your payments feels like the most stressful thing. Paying up that car, or house can feel like it is making you bankrupt. If you’re in that situation, and you’re also finding it tough to keep up with repayments of your assets, voluntary repossession could be a way to help you regain control of the situation.
For some people, voluntary repossession might look like giving up. But in hindsight, it’s about making a proactive choice before things get out of hand. How exactly? We’ll explain in this article. We’ll also make it clear what voluntary repossession really means, and the potential impact it could have on your finances. Let’s get started.
What Is Voluntary Repossession
Voluntary repossession is when you voluntarily choose to give back a financed asset, like a car, house, back to the lender because you’re unable to keep up with the payments. This lender is usually the bank. Basically, you’re saying, “I can’t afford this anymore, so I’m giving it back before things get worse.”
Instead of waiting for them to take action and repossess the item forcibly, you proactively return it on your own terms. This allows you to avoid any legal or financial action that might be taken against you if you fail to keep up with the payments.
How Does Voluntary Repossession Work
The process of voluntary repossession is as straightforward as it sounds, but it does need some technical knowledge.
Once you have decided that you can no longer afford the payments for your financed asset, whether it’s a car, house, or other property, the first step is to contact your lender; be it the bank or another loan.
After contacting them, they will guide you through their specific procedures. The process can be a bit different for different lenders, but in most cases, the lender will ask you to return the asset to a designated location. Once the asset is returned, the lender will sell it to balance out the remaining loan. If the sale price doesn’t fully repay the loan, you could still be responsible for paying the difference, which is known as a deficiency balance. The lender will either need an upfront payment to work with you to create a repayment plan for this remaining balance.
Pros And Cons Of Voluntary Repossession
Giving up your assets because of a difficult financial situation is painful. But it comes with its own pros and cons. Here are some of those:
Pros of Voluntary Repossession
Volunteer repossession has several advantages as compared to having your assets forcibly repossessed. Here are a few key benefits:
Helps Avoid Legal Action: By giving up the asset voluntarily, you can avoid the possible financial and legal consequences of forced repossession. You get a bit more control over the situation, and can avoid court fees or legal battles that could arise if the lender has to chase you down for missed payments.
Lower Fees: Forced repossession can cause some additional fees and costs. If you fail to make the payments, you might end up paying for things like towing fees, storage fees, and even court-related expenses. By choosing voluntary repossession, you can minimize or completely avoid these extra fees.
Less Damage to Your Credit: Don’t be fooled, voluntary repossession will still impact your credit, but it’s generally less harmful than having an asset forcibly repossessed by the bank. Since you’re taking responsibility for the situation and initiating the process, it shows that you’re being proactive, which could be viewed more favorably by future lenders.
Cons Of Voluntary Repossession
But while there are benefits, there are some disadvantages:
Credit Damage: Even though voluntary repossession is less damaging than forced repossession, it still affects your credit score. Lenders report the voluntary repossessions, and this can stay on your credit report for years, which can make it harder to get approved for loans or credit in the future.
Possible Deficiency Balance: If the lender sells the asset for less than what you owe on the loan, you could be responsible for paying the difference upfront or on a payment plan. So even after giving up the asset, you may still have to repay some portion of the loan.
Loss of Asset: Whether it’s a car or a house, voluntarily repossessing the item means you’ll no longer have access to it. You might have to make arrangements for transportation or find new housing, depending on what’s being repossessed.
Does Voluntary Repossession Hurt Your Credit
Yes, voluntary repossession does hurt your credit, but the effect may not be as severe as a forced repossession. When you return an asset voluntarily, it’s still recorded as a repossession on your credit report, and this can remain there for up to seven years. And make it harder to get approved for new loans or credit lines in the future. But, since you’re taking the initiative and acting responsibly by voluntarily giving back the asset, this can be viewed in your favor.
Another factor to consider is the timing. If you’ve missed multiple payments before initiating voluntary repossession, those missed payments will also negatively impact your credit score. So, even though the act of returning the asset voluntarily is seen as slightly more favorable, the overall damage could still be significant depending on your payment history.
Whether it’s a car or another asset, choosing to return it voluntarily lets you avoid the financial, and legal stress that often comes with forced repossession. While it does have an impact on your credit, the proactive step can still be viewed in your favor by lenders in the long run.