Returning your car to the lender before you are finished paying it off is called a voluntary surrender or voluntary repossession. In terms of your credit, a voluntary surrender is considered derogatory and will have a substantially negative impact on your scores, so it should be a last resort.
If you return the car to the bank, they'll simply market up as a repossession on your credit record, sell the car, pay off the balance of your loan, and in the matter.
Selling, trading in, refinancing, or negotiating a payment adjustment are usually better options to get out of a car loan without negatively impacting your credit score than running afoul of a knock to your credit.
Handing a car back is your legal right, so has no effect on your credit rating.
A voluntary surrender is turning your vehicle over to the lender because you're unable to make your auto loan payments—and it will hurt your credit. However, voluntary surrenders may not look as bad on a credit report as a repossession, so they may be a better option if offered.
Selling a financed car to a private buyer or dealership likely won't hurt your credit. However, if you have negative equity, you might need to refinance your auto loan or take out a personal loan to cover the difference between your car's value and what's left on your loan.
One way to get out of a car loan is to sell the vehicle privately. If you're not upside down on the loan, meaning the car is more valuable than what you currently owe on it, you can use the proceeds of the sale to pay off the current loan in full. Another term for an upside-down car loan is negative equity.
The name makes it sound less severe, but a voluntary repossession is essentially the same as an involuntary one as far as your finances go. You'll still have to pay for the costs of the auction. You may still face a deficiency, a collection lawsuit, and wage garnishment.
In some instances, a dealer may accept the return of a financed vehicle if it's necessary to avoid repossession. What's important to keep in mind here is that a vehicle's value depreciates quickly. Even after just a few months of ownership, you may owe more on the car than it's currently worth.
Yes, it is possible to get out of a car loan, but there are only two ways to do it: satisfying the terms of the loan or defaulting on the loan (which can end up with your car being repossessed). Unfortunately, it's not possible to just give back a car and end the financing agreement as though it never happened.
Note: If you're selling a car with an active loan, you're still the one responsible for paying it off, so the remaining balance on the loan will likely be subtracted from the price the dealer offers you. So if you owe more than what the dealer offers, you'll need to pay the difference to the lienholder.
The Bottom Line. Your car will eventually be repossessed if you don't pay your car loan. Before that point, you'll be charged late fees for your missed payments, your credit score will take a significant hit, and you may be charged fees for repossession.
Voluntary repossession can be a last-resort alternative to having your car repossessed by the lender. Although the effects aren't as bad as a full repossession, voluntary repossession still harms your credit score and makes it harder to borrow money in the future.
A repossession can stay on credit reports for up to seven years. According to Experian®, the seven-year countdown starts on the date of the first missed payment that triggered the repossession. But Experian says that once that time period ends, they'll automatically remove the account from your credit report.
Negotiate and finalize: You can negotiate with the dealer on the price of the new car, and on how much they will offer you for your trade-in. If the trade-in offer won't be enough to pay off your current loan, the dealer or lender may roll the difference into a new loan.
Having your car repossessed or surrendering it voluntarily is seen as a major negative event by lenders. They'll view you as high-risk. Expect your credit score to take a big hit, maybe over 100 points or more. That makes getting approved for financing in the future much harder.
If you can't make your car payments, there are some clear advantages to voluntary surrender compared with involuntary repossession: You can avoid some of the penalties and fees imposed during an involuntary surrender, like towing and storage fees.
If your lender can't locate your vehicle to do a "self-help" repossession, they can still sue you for the vehicle. This will involve a small claims case, where the judge will order you to give the car to the lender. You might even be compelled to Court to provide testimony about the location of the vehicle.
To get out of an upside-down car loan, consider making extra payments, refinancing or selling the vehicle. To avoid being upside down on your loan in the first place, shop around for good rates and try a larger down payment or a shorter repayment term.
Another option is to give up the vehicle to the lender voluntarily rather than going through the repossession process. The lender may find this option appealing because it avoids the costs of repossession, and it may agree to reduce or eliminate the deficiency balance on the loan.
Voluntarily Surrender the Car
A voluntary surrender allows you to return the vehicle to your lender on your terms, and while it can damage your credit, it won't have as big an impact as a repossession. You'll also be able to avoid certain repossession-related costs, which lenders may choose to add to what you owe.
In general, credit inquiries have a small impact on your FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores. For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history.
Trade-In Options: Many dealerships offer trade-in options where you can sell your financed car back to the dealership and apply its value towards a new vehicle. This is a popular choice for those looking to upgrade their cars.