Voluntary Vehicle Surrender: Here's what you need to Know Before You Hand in the Car Keys

Are you finding it difficult to pay your car loan EMIs on time? With a looming economic crisis, a large percentage of car owners are finding it increasingly challenging to pay car loan EMIs on time. During a financial crisis, it makes sense to cut down on the non-essential expenses, including car or two-wheeler loans. 

A voluntary vehicle surrender may seem like the best option available to you to get your car/ bike loan off your hands. But, are you aware of the financial consequences of a voluntary repossession? Here, in this guide, we take a look at the impacts of a voluntary vehicle surrender and help you decide whether it's the right option for you.

First, what is voluntary vehicle surrender? 

Also known as voluntary repossession – it’s returning your car to the lender because you can no longer afford to repay the car loan. The other option that is available when you do not meet the terms of the loan agreement is repossession (involuntary). 

In this case, the lender takes action and seizes your vehicle when you default on your loan payments. The lender generally sends a recovery (or repossession) agent to take your vehicle from you. Involuntary repossession of your car is an emotional and embarrassing experience.  

When compared with repossession, voluntary surrender of the vehicle is better – both emotionally and financially. 

How does voluntary surrender of a vehicle work? 

In a voluntary surrender, the first step is to let the lender know that you will no longer be able to repay the car loan. Then, you intimate the lender that you would like to give up your vehicle voluntarily.

Once you notify the bank/lender, the lender decides on a time and location. You can then hand over the keys of the vehicle and the car at the chosen venue. The lender then writes off your loan, and you are freed from the debt. In some cases, the current market value of the car/bike may not be sufficient to pay all your outstanding debts. In such cases, you may have to pay an additional amount to the lender to finish the pending loan.

How does voluntary vehicle surrender impact your finances? 

While a voluntary vehicle surrender may reduce your immediate loan troubles, it doesn’t magically wipe off all your financial woes. Here’s how it can take a toll on your finances in the long run. 

  • You may still owe money to the lender, even after surrendering the vehicle

When you surrender your car or bike to the lender, the lender tries to sell the car to pay the remaining loan balance. However, there may be chances that your vehicle's current market price is lower than the remaining loan balance.

In such cases, you have to repay the remaining loan value to the bank/lender. The lender transfers your pending balance to a collection agency, which is recorded on your credit history. If you’re unable to pay the balance amount, the lender takes you to court, which further increases your financial troubles. 

  • It impacts your credit score 

Voluntary surrender is just like any other loan default. Even though you take a proactive step here, it shows up in your credit history and brings down your credit score. A negative remark on your credit history can remain up to seven years.

However, note that though your credit score takes a hit, voluntary vehicle surrender is marginally better than an involuntary repossession. A voluntary surrender on your credit history indicates to future lenders that you took responsibility for your loan, and it can work in your favour. 

  • It impacts your ability to secure loans in the future 

The negative impact of a voluntary surrender may cause future lenders to think twice before approving your loan request. And, even when you are approved, you may be charged a higher interest, as you are considered more likely to default on the loan. 

What are the alternatives to voluntary surrender? 

Before you hand in the car keys, make sure to check out if any other options can help to improve your financial situation. Here are a few alternatives to consider:

  • Try negotiating with the lender 

Get an appointment with your lender and explain to your bank that you’re having a hard time financially. Check if the lender is willing to alter the loan terms like pausing payments for a few months, or lowering the monthly EMI and so on. 

In most cases, lenders are willing to work with borrowers to reduce their loan burden. If your lender agrees to changes in the loan agreement, make sure to get the new loan agreement in writing, so that you can avoid troubles down the line. 

  • Opt for loan refinancing

Look around and see if you can find other lenders who are willing to take over your existing car loan at a lower interest rate. Reducing the interest rate of the loan lowers your monthly EMIs, which in turn, reduces your loan burden significantly. 

Some lenders may even offer you an extended loan repayment tenure, which further reduces the EMI. However, keep in mind that the longer you take to repay the loan, the more interest it will accrue over time.

  • Sell the vehicle 

Before you surrender the car to the lender, you can try selling it on your own. It's a great option, especially if the current market value of the car is more than the outstanding loan amount. You can then use the sale proceeds to pay your outstanding loan balance and use the remaining amount to purchase a more affordable vehicle.

There are plenty of aggregator websites that help you determine the accurate selling price of your vehicle based on its age, model, and make.

EndNote

Be Aware of the Implications before you Voluntarily Surrender your Vehicle 

While a voluntary surrender is a better option than getting your car repossessed, it should be your last resort. Make sure to try the other alternatives before you give up the keys to your vehicle.

Keep in mind that a voluntary surrender leads to a negative effect on your credit history. However, if you have exhausted all other options, then go ahead with the voluntary surrender. You can reverse the adverse effects on your credit, with regular monthly payments on all your bills and loans in the future.