Surrendering your vehicle, known as a voluntary repossession, affects your credit substantially. Also, if you have a co-signer, her credit is also affected. Before you decide to voluntarily return your new car, understand the financial consequences of doing so. Instead of surrendering the car, you may have other options available to you.
Repossession
Two types of repossession exist: involuntary and voluntary. If you return your vehicle willingly, your lender reports the return as a voluntary repossession to the credit bureaus. If the bank hires a repossession company to collect your vehicle and return it to the bank, the lender reports the return as an involuntary repossession. Despite the different names, both affect your credit rating the same. Future creditors will see you have a repossession history and a low credit score, even if you returned it willingly.
Credit Risks
Repossession significantly damages your credit score and remains on your credit report for seven years. Borrowing another car loan or pursuing other forms of lending (such as a home mortgage) during this time will prove difficult. Some employers also check credit, so future employment can also be affected. If you can obtain credit or a loan in the future, you'll be considered a high-risk borrower and will likely pay higher interest rates.
Legal Action
Even though you returned your vehicle, you are responsible for any balance due on the loan. Once the vehicle is returned, the bank will resell the car either at auction or privately. The bank will notify you of the vehicle's sale price and request you to pay the amount due. Collection attempts begin soon after. If you do not pay the balance, the bank can pursue a judgment, further damaging your credit. It can also garnish your wages to get its money back.
Considerations
If you are trying to return your vehicle because of a lemon law issue, do not stop paying your loan bill. Lemon law procedures and the vehicle's loan are two separate matters. Until the situation is rectified, you must make your car payment as specified in your bank contract. If you no longer want your new car, sell it on your own to avoid repossession. Or, you can trade it to a dealer for another car purchase. Talk to your lender or dealer to explore your options.
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