How Badly Will a Lease Surrender Affect My Credit?

In the mind of a borrower, voluntarily giving back a car -- or lease surrender -- is better than defaulting on the debt and requiring the lender to forcibly take it back. Nevertheless, the credit agencies do not care and voluntary and involuntary repossession affect your credit in the same manner. Voluntary repossession is usually a cheaper option than a forced repossession.

Identification

Lease surrender affects your credit, because most car dealerships report auto lease accounts to the national credit bureaus. Repossession means the lender receives less than the amount originally borrowed, so it has a negative impact. Any account that results in a delinquency tends to take several dozen points off of your credit score, and possibly more than a 100 points -- making it the second worst item to a bankruptcy.

How long Will it Affect Your Credit?

Like most negative accounts, a lease surrender drags down your credit score for seven years. However, the FICO scoring system's design reduces the importance of negative items as time goes on. If you continue to use credit, pay bills on time and limit your debt load, your score will eventually recover -- probably well before the seven-year reporting time limit ends, according to Maxine Sweet, head of public education at Experian.

Public Judgment

When a lender takes back a car, you will owe any money left on the loan after the car goes up for auction -- called a deficiency balance. If you cannot pay the deficiency balance, the lender could sue for a public judgment, such as wage garnishment. A public judgment will further erode your credit score and cause financial hardship if it interferes with your ability to repay other loans.

Tip

You should negotiate with the creditor for a reprieve before the loan defaults beyond recovery. Possible solutions include deferring payments in case of a short-term hardship and a lower interest rate. If you cannot afford the car in any circumstance, voluntary repossession is cheaper, so you at least lower the possible deficiency balance.