There are advantages to voluntarily giving your lender the title to your car. This is because a voluntary repossession is better than having the car forcibly taken by the lender. People expect that there would be a difference in how long a voluntary repossession would stay on a person’s credit report versus an involuntary repossession. The answer may surprise you.

The answer is up to seven years

A voluntary repossession stays on your credit report the same way an involuntary repossession stays on your credit report. Both remain on your credit report for a period not to exceed seven years, and both start from the date the first payment on the loan was due.

The biggest misconception about voluntarily surrendering your car to the lender is that people think that by doing so, the credit report would reflect the repossession in a more favorable light. That is, by giving the car back to the lender, the credit report would state that the credit union no longer has a security interest in the vehicle. This is not true. The credit report states how the vehicle changed ownership, not why.

Why the timeline is identical to a voluntary repo

From a credit reporting perspective, voluntary repos and IRs are the same thing. A loan is not paid and, as a result, the lender repossesses the collateral. The method of repossession doesn’t impact the seriousness of the delinquency and, therefore, doesn’t impact the scores. For example, a voluntary surrender is still serious and, therefore, still negatively impacts scores. The impact is generally comparable to that of an IR.

Voluntary surrender has benefits

Although there is little to no difference in the credit report impact of a voluntary surrender versus an IR, there are other, and more important, impacts of a voluntary surrender that are positive.

• Lower total cost. An automobile that is surrendered voluntarily results in less money being owed because the costs of towing and storage, and the fees charged by the repair company, are avoided.

• More Options. Before a loan is surrendered voluntarily, there may be other options available. These may include changes to the terms of the loan or other workouts.

• Possible impact on a future lender: A voluntary surrender may impact a credit score the same as an IR. Still, a human reviewing a credit file may have a more favorable view of a voluntary surrender because it may indicate the debtor was trying to work out the situation.

• Be it practical or logical: There are differences when a lender voluntarily repossesses your car versus when they take it by legal means.

What happens after a voluntary surrender?

Just because the repossession is voluntary doesn't mean it isn't without consequences. Consequences still occur and are similar to those of an involuntary repossession.

• There may still be a deficiency balance. A deficiency occurs when the vehicle sells at auction for less than the loan amount. In that case, you're still obligated to pay the balance, and it may be collected by the lender.

• Like an involuntary repossession, voluntary surrenders also negatively impact your credit. It impacts your credit score approximately the same as an involuntary repossession.

• The difference is, voluntary surrenders aren't as detrimental to your score as an involuntary repossession. For people with high credit scores and a clean credit history, a voluntary surrender may only hurt your score by around 100 points.

How long does it take for the effect to disappear?

The effect is at full power for only a short time. It spends the bulk of its presence fading.

• Year 1–2: The effect is at its strongest.

• Years 2–5: If you make consistent on-time payments, it fades even more.

• Final 1–2 years: It fades even more, but it is still there and affecting your score.

Can it be removed before seven years?

It is removable in the same circumstances as any voluntary repo.

• It can be removed if there are disputes about the balance, date, or if there is duplicate reporting. These can be disputed for free.

• A goodwill adjustment is at the discretion of the lender.

• There are no collection agencies chasing the debt, but if a debt collection agency bought the debt, then the collection agency can remove it if you pay the original debt.

The only other way it can be removed is if it is an involuntary repo, and it is also at least 7 years old.

Weighing your options before handing over the keys?

Before you surrender your property, consider these points.

• Contact your lender as soon as you know you will not be able to make a payment. In some cases, the lender may be willing to work with you to create a payment plan to avoid repossession.

• Voluntary repossession is better than an involuntary one. With a voluntary repossession, you avoid the unexpected costs of an involuntary repossession and storage. The impact on your credit report will be the same for both types of repossession.

• Get any agreement you reach with the lender to surrender the property in writing. Be sure to obtain the terms of the agreement regarding how the lender will report the completion of the agreement and the amount you owe after the completion of the agreement.

Rebuilding in the meantime

The best ways to rebuild your credit, whether a voluntary or involuntary repossession occurred, are to:

• Make payments on time.

• Limit your credit card usage.

• Ask your bank to increase your credit limit.

• Dispute inaccurate information

A credit repair agency may be able to assist you in rebuilding your credit by disputing inaccuracies and negotiating with creditors. Many of these companies, like Heads Up Financials, will assist you with developing a financial plan to achieve larger goals.

Frequently asked questions

Will voluntary surrender affect my credit score less than a repossession?

Repossession and credit score impacts are generally equivalent. Less credit score impact is of secondary concern to other issues such as the fees associated with the repossession and the impact the repossession has on your relationship with the creditor.

Will a voluntary surrender be reported as a repossession?

Voluntary surrenders are generally reported as such. There are still negative credit impacts.

Can I get the creditor to report the repossession as something less negative, like a "settled" account?

Again, this is something that can be negotiated, and especially if you are willing to pay off the deficiency balance, but be aware that you will need to reach an agreement to this effect before making any payment.

Will a voluntary surrender be reported on my credit report if I repaid the deficiency balance?

Yes, reporting a voluntary surrender is not impacted by the repayment of the deficiency balance. Paying off the deficiency balance closes the collection account(s) related to the repossession.