Turning In Financed Car - Financial Power

Returning a financed car, often called a voluntary repossession or “turning in the keys,” is a serious decision with significant consequences. While it seems like a simple solution to unmanageable car payments, it can severely damage your credit score and leave you owing a substantial amount of money.

Understanding the Process

Essentially, you’re giving the car back to the lender before the loan is fully paid off. This means you’re breaking the loan agreement. Contact your lender and inform them of your situation. It’s crucial to document all communication, including dates, times, and the names of representatives you speak with. Confirm the exact procedures for returning the vehicle, including the designated drop-off location and required paperwork. Be sure to remove all personal belongings from the car before handing it over. Failure to do so could mean losing these items.

The Financial Implications

Don’t assume that turning in the car eliminates your financial obligation. The lender will sell the vehicle at auction, usually for less than its fair market value. The difference between the auction price and the remaining balance of your loan (including any fees associated with the repossession and sale) is called the “deficiency balance.” You’re legally responsible for paying this deficiency balance. The lender may pursue collections actions, including lawsuits, to recover the debt.

Consider this example: You owe $15,000 on your car loan. After repossession and auction, the car sells for $8,000. The lender also incurs $1,000 in repossession and sale fees. Your deficiency balance is $15,000 (original loan) – $8,000 (auction price) + $1,000 (fees) = $8,000. You still owe the lender $8,000.

Credit Score Impact

A voluntary repossession will negatively impact your credit score. It will remain on your credit report for up to seven years. This can make it difficult to obtain future loans, credit cards, or even rent an apartment. The lower your credit score, the higher the interest rates you’ll likely face when you do qualify for credit.

Exploring Alternatives

Before resorting to returning the car, explore all other options. Consider refinancing your loan to lower your monthly payments, although this will likely extend the loan term and increase the total interest paid. Contact your lender to discuss potential hardship programs or payment plans. Selling the car privately might allow you to recoup more money than an auction, potentially reducing the deficiency balance. Also, explore options like car donation programs which may offer tax benefits. If you’re struggling with debt, consider consulting with a credit counselor who can provide personalized advice and help you develop a debt management plan.

In conclusion, turning in a financed car should be a last resort. Understand the financial and credit score consequences before making a decision and exhaust all other viable alternatives.