Many think that voluntarily giving up your car lessens the impact on your credit score as opposed to the lender repossessing it. People often think this is the case because they believe the credit scoring agencies reward people for taking responsibility for their actions. Unfortunately, this is far from the truth, and I will tell you the effects voluntary repossession has on your credit score, the effects it has compared to an involuntary repo, and where the true differences occur.

The short answer

From a credit score's perspective, voluntary and involuntary repossessions are treated equally. The difference is, sometimes, a voluntary repo is given slightly less weighting compared to an involuntary repo. Both are considered very negative events and are treated similarly to a foreclosure or a charge-off.

Where the true differences occur

The credit scoring agencies aren't focused on the details of how the lender received the repossession of the vehicle. The scoring agencies are focused on the fact that the lender received the vehicle and the loan was not repaid. The scoring agencies give weighting to the payment history of an individual, and a repossession of any kind is treated the same as a long-term failure to make payment on a loan.

The true difference in how a repossession is treated occurs in the report of the event. If the repossession was voluntary, it gives more negative detail to the individual as to why the repossession occurred. Still, it doesn't change the impact the repossession has on the individual's credit score.

What is a Voluntary Surrender?

Most of the consequences for voluntary and involuntary surrender are the same. However, there are some differences. Voluntary surrender has some advantages over involuntary surrender. The key differences are summarized below.

• Less Total Debt: With an involuntary surrender, you still have to pay the bill if the creditor auctions the collateral for less than the loan amount. You may also have to pay for the costs associated with towing and storing the collateral. A voluntary surrender avoids all of these costs, and the debt owed is usually less than with an involuntary surrender.

• More Options Before Default: Communicating with the lender before default may allow you to change the terms of the loan to be more favorable. In some cases, you may even be able to avoid defaulting on the loan altogether.

• How It Looks to Future Lenders: A voluntary surrender may help your credit score because a loan officer may view the voluntary surrender as positive because you communicated with the lender.

Factors that make it worse

• A related deficiency sold to collections: This makes it worse because you now have two collections instead of one.

• A high starting credit score: People with high credit scores may see larger changes because they have more room for the score to go down.

• Also, during this time frame, there were other missed payments. While the effects of a repossession and voluntary surrender can be remedied with the passage of time, the compounding effect of a surrender and other delinquencies considerably impacts the credit record.

• New credit applications and/or increases in credit limit were made in the months following the repossession and voluntary surrender. The effects of a repossession are compounded by new credit applications and accounts being opened. From a scoring model perspective, additional hard inquiries and new credit accounts signal increased risk.

How does the damage change over time?

• Months 1–24: the damage is the most considerable.

• Years 2–5: the damage is less, and it continues to lessen if there are no new negative items and timely payments are made.

• Final 1–2 years before removal: the damage is considered negligible; however, a voluntary surrender does remain on the report for the full seven years from the date of first delinquency and is still damage-reported credit.

Are there methods to lessen the damage?

Involuntary Repossessions are still negative items, and the following methods do not alter that, but do lessen the damage in other areas.

• Disputes can be filed for items that are inaccurate, such as items that show a balance when it should reflect that the account is charged off.

• Contact the original lender and request that they remove the item from your report.

• In order to lessen the damage in other areas, it is best to concentrate on credit improvements in other areas such as using credit responsibly, having a low credit balance, and ensuring timely payments. Negotiation of a pay-for-delete with a collection agency may improve your credit score faster; however, you need to negotiate a pay-for-delete prior to making payment.

• Voluntary repos obviously hurt credit, but they can sometimes be the best option, particularly in relation to other financial goals (e.g., repairing credit to qualify for an auto loan). A voluntary repo typically stays on credit reports for 1 to 2 years, but lenders are required to remove it after that.

If you are working on other financial goals, it may be a good idea to enlist the help of financial planners who can work on your credit dispute and/or repair case.

Frequently asked questions

Are voluntary repossessions better than involuntary ones?

The main difference between the two is that credit scores are only minimally affected by voluntary repossession, and the main advantages of voluntary repossession are the avoidance of additional fees and a better relationship with the lender.

Will voluntary repossession affect my credit history differently than an involuntary repo?

In most cases, no. Your credit score will primarily be affected by how thoroughly you practice credit score reconstruction (i.e., how many on-time payments you make, how low you keep your credit utilization, how long you go without incurring new negative marks on your credit history).

Does it affect the extent to which I am authorized to extend credit in the future?

It might, unofficially. A voluntary repo might actually be viewed somewhat positively by an employee reviewing your credit application.

Is it at all possible to remove the effect of the deficiency balance on my credit score?

If the balance is settled, the bank may report it, and a settlement may be negotiated.