What Happens if I Return My Car to the Lender Before I Finish Paying It Off?

Can You Return a Financed Car?

Yes, you can return a financed car before your auto loan is paid off. This is known as a voluntary repossession or voluntary surrender. However, voluntary surrender is considered a negative event on your credit report, so it's best avoided if at all possible.

How Does a Voluntary Repossession Impact Your Credit?

A voluntary repossession will be reported to credit bureaus and can seriously damage your credit scores. The voluntary repossession will remain on your credit report for seven years from the original delinquency date (that is, the date of your first missed loan payment). After seven years, your auto loan account will be deleted and will no longer affect your credit scores.

When you voluntarily surrender your car, your lender will sell it to pay off the loan. If your car is worth less than the balance of the loan, you'll be responsible for any remaining amount. For instance, if your car sells for $20,000 and you have a $23,000 balance on your loan, you'll owe the lender $3,000.

Unless you pay the outstanding amount, the lender may turn your account over to a collection agency. A collection account may appear as a separate account on your credit report and will also have a negative impact on your credit scores. The collection account stays on your credit report for seven years after the loan's original delinquency date.

A voluntary surrender is slightly better than a repossession because it indicates to lenders that you're cooperative and accepting responsibility. However, it's still considered defaulting on your debt, and can make lenders reluctant to work with you in the future.

Learn more: How Can I Stop My Car From Being Repossessed?

How to Avoid Voluntary Repossession

If you're having trouble making your car payments and want to avoid the damage to your credit that a voluntary repossession can do, consider one of these alternatives.

• Ask your lender about hardship options. If you haven't already done so, your first move should be talking to your lender. They may be willing to adjust your payment plan or let you defer a few payments until you get back on your feet financially.
• Get financial help from your family. If you're having a short-term financial setback, a family member may be willing to lend you the money to temporarily cover your car payments. To avoid damaging your relationship, create a contract with a payment plan and repay the loan as agreed.
• Let someone else take over the payments. Some lenders will let you transfer your loan to a friend or family member who will take ownership of the car and make the loan payments.
• Refinance your auto loan. If you have good credit, refinancing your loan to one with a lower interest rate or a longer loan term could lower your payments to a manageable amount, enabling you to keep your car. Keep in mind that a longer loan term can ultimately cost you more in interest, and you could end up owing more than the car is worth.
• Sell the vehicle. If your car is worth as much as or close to the balance on your loan, you could sell it and pay off the loan to avoid damaging your credit. Even if the sale price doesn't cover the full loan balance, you may be able to refinance the remaining amount so your payments are more affordable.
• Trade in the car for a cheaper model. When you trade in a financed vehicle, the dealer will pay off your loan and apply any remaining money from your trade-in toward your new vehicle. If you owe more than the vehicle's trade-in value, you can either roll the remaining loan amount into your new loan or pay the dealer a lump sum.
• Make more money. Increasing your income with a side hustle, part-time job or overtime at work could help you cover your loan payments so you can keep your car.

Learn more: What to Do if You Can't Afford Your Car Payments

How Can I Rebuild My Credit After a Voluntary Repossession?

A voluntary repossession can deal a serious blow to your credit scores. Fortunately, there are things you can do to start rebuilding your credit scores right away.

• Review your credit report and credit scores. You can check your Experian credit report and FICO^® Score^☉ for free to see how lenders view you. If your credit report contains information you believe is inaccurate, you have the right to file a dispute with the credit bureau.
• Bring past-due accounts current. If you're behind on any other credit accounts, bringing them current is an important step to improving your credit scores.
• Pay any outstanding debts, such as collections or charge-offs. Accounts with a history of past-due payments will still be considered negative, but lenders may be more disposed to extend credit in the future if they see that you've since repaid the debt.
• Make your other payments on time. Your recent payment history has the biggest impact on your credit scores. Consider setting up autopay to make sure your credit accounts are paid on time. As time passes, previous delinquencies will have less of an effect on your credit report.
• Pay down credit card balances. Credit utilization ratio is an important factor in your credit scores. Keeping your credit card balances below 10% of your credit limit can help improve your credit scores. Consider using the debt snowball or debt avalanche method to tackle high credit card balances.
• Become an authorized user on someone else's credit card. Being an authorized user can benefit your credit scores if the primary cardholder has good credit and uses their card responsibly.
• Get a secured credit card. Secured cards require an initial deposit that typically equals your credit limit, reducing the card issuer's risk. Using a secured credit card for small purchases each month and making payments on time and in full can help improve your credit scores.
• Keep unused credit accounts open. Even if you're no longer using it, closing a credit card can negatively impact your credit scores by reducing the average age of your credit accounts and increasing your credit utilization rate.
• Sign up for Experian Boost^®ø. Experian Boost is a free feature that adds eligible on-time payments such as your utility, cellphone, insurance and streaming service bills to your Experian credit report, which can help increase your credit scores.

Learn more: How to Repair Your Credit

The Bottom Line

Voluntarily surrendering your financed car to the lender does slightly less harm to your credit scores than having the vehicle repossessed. But because a voluntary repossession does significant damage to your credit, it should be a last resort.

If you decide to voluntarily surrender your car, take steps to repair your credit as soon as possible. Signing up for Experian's free credit monitoring service can help you stay motivated along your credit journey. You can gain insights into changes to your credit report, get tips on improving your credit scores and track your progress.