Are you finding it increasingly difficult to repay your car loan EMIs on time? Life is unpredictable and there are plenty of situations that can lead one to a financial crisis. You may have lost your job, there may be a medical emergency in the family, or you meet with any other substantial expense. In all these situations, the smartest choice is to cut down your existing debts. 

One of the biggest debts facing individuals today are car loans. If you cannot make ends meet to pay your car loan EMIs on time, you can consider returning the car to the lender. There are two options available – voluntary surrender by the borrower or repossession of the vehicle by the lender. 

Before, you choose either of these options, you need to understand how the process works and the implications. Here, in this guide, we give you all that you need to know about voluntary surrender as well as repossession to help you make the right choice. 

How does a car loan work? 

Before we look at either options, let’s spend a few minutes understanding how car loans work. The lender offers you the amount to purchase the car. For this service, you repay the principal (loan amount) along with interest to the lender as fixed EMIs. 

When you borrow a car loan from a lender, the vehicle acts as security for the loan. It means, in the unfortunate event that you’re unable to repay the loan, the lender can repossess your vehicle. The lender can sell the car and use the proceeds to settle the outstanding loan balance that you owe the bank. 

However, note that even when the car is sold, the balance amount you owe to the lender might not be settled completely. For instance, let’s say the vehicle has depreciated in value and the selling price is lesser than the amount you owe. In this case, you still owe the remaining balance to the lender. 

Now, let’s see the options that are available to you, when you’re unable to repay the loan. 

#1: Standard Repossession – What is it? 

In repossession, the lender takes your vehicle away from you without you volunteering to give it up. Very often, banks and NBFCs appoint recovery or repossession agents to complete the process on their behalf. They can send a driver to take away your car. Note that lenders retain the spare key of your vehicle till your loan has been paid in full. Alternatively, they can send a tow truck to drive your car to their garage. 

What are the problems with Repossession? 

One of the biggest drawbacks of repossession is that it is marked on your credit report, thereby adversely impacting your credit score. Besides the outstanding loan amount that you owe the lender, the costs of repossession are also added to your existing loan balance. 

The charges for repossession include – the costs of hiring a recovery agent, storing the vehicle in the garage of the lender till it can be sold, preparing the vehicle for sale and more. All these costs are added to your loan balance, thereby further increasing your debts. 

#2: Voluntary Surrender – What is it? 

As the term implies, in voluntary surrender you return the vehicle to the lender, when you’re unable to make a repayment. You explain your financial situation to the lender and inform them that you would be unable to make EMI payments going forward. 

Once the lender accepts your situation, you surrender the vehicle as well as the keys to the lender. Since, in this process, you give up the car on your own, it’s termed as voluntary surrender. 

Why opt for Voluntary Surrender?

The biggest reason to opt for voluntary surrender is to save yourself from potential embarrassments. In a standard repossession (non-voluntary), the lender appoints recovery agents to collect your vehicle. The recovery can happen anytime – irrespective of whether you are at the office or at home. Recovery agents can contact you in public spaces, causing embarrassment for you and your family. In a voluntary surrender, you are in charge of returning the vehicle to the lender and you can do it when it’s convenient for you. 

Does Repossession/Voluntary Surrender Impact your Credit Score? 

Yes. Irrespective of whether you give up the vehicle voluntarily or the lender forcefully repossesses it, there are significant damages to your credit score. Your credit ratings take a hit every time you default on a loan. 

When you’re unable to pay your vehicle loan EMIs on your time, it means that you have lost your ability to make payments. This, in turn, brings down your credit score. However, the impact of defaulting on loans recede after seven years. 

Generally, your credit scores start to improve after a few years of surrendering your car, due to not being able to pay. 

However, note that voluntary surrender is slightly better than repossession from a credit perspective. It shows up differently on your credit report. For instance, in the future, a prospective lender who goes through your credit report may note that you have taken the initiative to give up the vehicle. This can work in your favour, as it shows your responsibility. However, it’s not a guarantee. 

Though both voluntary surrender and repossession are bad for your credit history, a voluntary surrender hurts your credit score slightly less than getting your vehicle forcibly taken away. 

Additional Reading: Will Missing A Single Payment Affect My Credit Score?


Be Proactive and Keep the Lines of Communication Open with the Lender 

If you’re wondering what you should do if you’re unable to repay your car loan EMIs on time, our best advice is to take the initiative. Try to handle the situation before it’s too late. 

Remember the best choice available to you is to communicate the situation with the lender. Some lenders may be understanding and offer you alternatives like temporarily stopping repayments and so on. 

Lenders are willing to work with proactive borrowers than lazy defaulters. So, be honest and forthright with the lender. You can approach the lender to re-alter the repayment schedule, by extending the tenure (which lowers the EMIs).