Voluntary Repossession

The most common way to legally default on a car loan is by going through a voluntary repossession. During a voluntary repossession, the owner of the car does not have to deal with the hassle, aggravation, embarrassment and fees charged by a professional repossession company, and their credit is usually not as badly affected.

Voluntary repossession usually start when the owner of a car decides that he or she can no longer afford the vehicle, as opposed to an involuntary repossession, which typically starts as soon as the vehicle owner is in default. Note that in the United States, a loan account is in default as soon as the owner is late on a payment by at least one day. A voluntary repossession gives the owner of a vehicle to get out of the car loan without the late payments showing up on his or her credit history; this is why a voluntary repossession is usually better for a credit score than an involuntary one.

After a car owner decides to give up his or her vehicle, they should contact their lender and inform him or her of their decision. In some cases, a bank representative might try to negotiate new loan terms in the hope that a borrower will not return the vehicle. This occurs most often in cases where the amount of the loan exceeds the value of the car, and the borrower has some extenuating circumstances that make him or her unable to make payments at the present time, but that would not prevent him or her from making payments in the future.

For example, an individual who has recently had his hours cut back at work may be able to negotiate a longer loan period with lower monthly payments because he would be able to make the new payment with his new monthly income. A person who has lost their job and cannot afford any payment on a vehicle which is more than 35% paid for might not be able to negotiate at all. This is because the bank considers someone with no income to have a very low likelihood of being able to make any kind of car payment, and it believes that it might be able to recoup most of its loss by selling the car at auction.

If negotiation with the bank is not an option, a location to drop the vehicle off will be arranged. In cases where the car was financed through a dealership or manufacturer-owned finance company, the borrower will be told to just bring the car back to the dealership. If the loan is through a private bank or credit union, the borrower will usually be given the location of a secure lot. Note that in these cases, a car should not simply be returned to the dealership. The dealership probably does not have a formal relationship with the bank, and the car will be treated as either abandoned property, or the bank will charge the borrower fees similar to what he or she would have paid in an involuntary repossession.