What Happens to Your Credit Score if You Turn in Your Car Back to the Bank ?

If you aren’t able to pay your car loan, the bank may try to repossess it as partial or full payment for what you owe. However, you can avoid the emotional drama of a repossession and a little bit of the damage to your credit score, if you voluntarily surrender the car rather than force the bank to come get it from you.

Voluntary Surrender ProcessWhen you voluntarily surrender your car to the bank, the bank takes possession of the car and sells it to recover as much money as possible to put toward your outstanding loan balance. According to Experian, it’s slightly less drastic than repossession because rather than the bank sending someone to repossess your car, you willingly turn it over and at least know that the bank has the car rather than a car thief. When you do a voluntary surrender, your credit report will report “voluntary surrender” on the auto loan account.

Credit Score EffectsThe impact on your credit score from a voluntary surrender is only marginally better than if the bank had to repossess the car from you. No bank wants you to default on your debt, but it’s even worse when you make a bank go through the time and expense of repossessing your car. The next time you apply for a loan, you’ll likely have a hard time getting approved and may have to answer questions about the voluntary surrender.

Excess DebtIf your car sells for less than what you owe, that debt will continue to be reported on your credit report as an outstanding balance, which hurts your credit score. Even worse, the bank may turn it over to a collections agency, which will also report the negative information to the credit bureaus. For example, say that you owe $7,000 on your loan but your car only brings $5,500 when it’s sold by the bank. You still owe the bank $1,500, and until you pay it, it gets reported as delinquent debt on your credit report. If the bank turns over the $1,500 debt to a collections agency, that will further harm your credit score.

Forgiven DebtIf you have to do a vehicle surrender, understand all the terms of the agreement. You can try to negotiate to get the bank to accept the car as full settlement of your debt, so you’re not on the hook in case the car sells for less than you owe. But, a settlement won’t stop it from negatively impacting your credit score. Even if the bank agrees to forgive whatever is left of your debt after selling the car, you’re not completely out of the woods yet because that counts as taxable income. For example, say that you have $1,500 of debt left after the bank sells the car. If the bank forgives that $1,500, you must pay federal income taxes on an extra $1,500 of “income” that year.

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