How Returning a Car Can Affect Your Credit Score

Returning a car to the lender, known as a voluntary surrender, isn't a get-out-of-jail-free card. It signals a loan default, which can significantly damage your credit score for years.

1. Voluntary Surrender: The process starts when you inform your lender you can no longer make payments and arrange to return the vehicle. While it avoids a forcible repossession, it's still considered a default on your loan agreement.

2. Credit Report Impact: The lender will report the account status to the major credit bureaus. The account will be marked as a "voluntary surrender," a negative entry that directly impacts your payment history and can lower your credit score significantly.

3. Vehicle Auction: To recoup their losses, the lender will sell the car, usually at an auction. The sale price is often much lower than the amount you still owe on the loan.

4. Deficiency Balance: The difference between what the car sells for and your remaining loan balance is called the deficiency balance. You are still legally responsible for paying this amount.

5. Collections Account: If you fail to pay the deficiency balance, the lender can sell the debt to a collection agency. A collections account is another serious negative mark that will further damage your credit score and remain on your report for up to seven years.

How Much Will Returning a Car Affect Your Credit Score?

The exact impact on your credit score can vary, but several key factors determine the severity of the damage. Consider the following points when returning a vehicle.

• Voluntary Surrender. This is when you willingly return the car because you can't make payments. While it may seem proactive, it still significantly damages your credit score.
• Credit Report Notation. The lender reports the account as "voluntarily surrendered" to credit bureaus. This negative mark, along with missed payments, stays on your report for seven years.
• Deficiency Balance. After selling the car, you may still owe the remaining loan balance. This deficiency can be sent to collections, further harming your credit if unpaid.

How You Can Avoid Returning a Car Affecting Your Credit Score

Consider a Voluntary Surrender

A voluntary surrender involves informing the lender you cannot make payments and will return the car. While it still negatively impacts your credit, it can be viewed slightly more favorably than an involuntary repossession, as it shows cooperation with your lender during the process.

Sell the Vehicle Privately

You can sell the car yourself and use the proceeds to pay off the loan. If the sale doesn't cover the full balance, you'll owe the difference, but this proactive step can help you avoid a default on your credit report entirely.

Negotiate with Your Lender

Contact your lender if you anticipate payment trouble. They may offer solutions like loan modification or temporary deferment. Adjusting your payment terms can help you keep the car and protect your credit score from the damage associated with a return or repossession.

Ways to Improve Your Credit Score

Improving your credit score takes time and consistent effort, but it is always possible to enhance your creditworthiness and achieve a healthier financial profile. According to a comprehensive guide, most people see meaningful changes within three to six months of adopting positive habits.

• Monitor your credit reports regularly. Obtain your free reports to identify and dispute any inaccuracies or fraudulent activity that could be negatively impacting your score.
• Establish automatic bill payments. Your payment history is the most significant factor in your score, and automating payments is the easiest way to ensure you never miss a due date.
• Reduce your credit utilization ratio. Aim to use less than 30% of your available credit, as this is the second most important element in calculating your score.
• Become an authorized user. Being added to a credit card account with a strong payment history and low utilization can add positive data to your credit file.
• Diversify your credit mix. Having a variety of credit types, such as credit cards, installment loans, and a mortgage, shows lenders you can manage different financial products responsibly.
• Limit hard inquiries. Space out your credit applications and use prequalification tools whenever possible, as too many applications in a short time can temporarily lower your score.

The Bottom Line

Returning a car, known as voluntary repossession, is noted on your credit report and can lower your score. You may also owe a deficiency balance, further impacting your credit if unpaid.

Frequently Asked Questions

Will a voluntary surrender hurt my credit less than a repossession?

No, both a voluntary surrender and a repossession are recorded negatively and have a similar, significant impact on your credit score for up to seven years.

How long does a car return stay on my credit report?

A voluntary surrender or repossession can remain on your credit report for seven years from the date of the first missed payment that led to the default.

Can I get another car loan after returning a vehicle?

It’s possible but challenging. You'll likely face higher interest rates and stricter loan terms until your credit score improves and the negative mark ages.