If, due to financial hardship, you have to turn your car over to a creditor because you couldn’t pay your car loan, here are the consequences for your credit. And how can you get back on track!
This is the question asked by one of our readers. After losing her job, she found herself unable to make the monthly payments on her car loan, and had to resort to returning her car to the creditor. “This is what we call a voluntary surrender. It involves returning the financed instrument to the creditor, but without filing for bankruptcy or presenting to the consumer,” explains Sophie Desautels, first senior director of financial recovery and recovery and insolvency group at Raymond Chabot.
It is possible to make a voluntary surrender with other mortgaged property – that is, to which a loan published in the RDPRM is linked – such as an ATV, a snowmobile, a recreational vehicle, a boat, etc. This also applies to car rental.
Impact on credit report
Our reader has since found a good job, but she fears the forgiveness she had to offer would prevent her from getting a loan to buy a new car. This obviously had a negative impact on the credit report. The first step to take is to obtain your file from the two agencies, Equifax And TransUnion, to find out what it contains. This application is free and can be submitted online.
The ratings listed on the file range from R1, the best, to R9, the worst, which is awarded in the event of bankruptcy. “An R8 rating is assigned in the event of a voluntary surrender of property. This is what must appear in the file,” explains Sophie DeCesoteles.
This rating will remain on file for six years, which will have a clear negative impact on access to credit. However, it is possible to raise your rating and improve your situation.
Raise your rating
However, this will require time and patience. To restore borrowers’ trust and improve your rating, you can start by submitting small credit applications. “For example, you get a credit card with a secured amount, that is, a card for which you have paid an amount as security. That’s a good start. After a certain period of time, if you have used your card responsibly, you can then ask for a credit limit increase. You should also always make sure From paying off the balance in full before the deadline and paying your bills on time. Be careful not to use more than 30 to 35% of your credit limit,” recommends Sophie Desautel.
All this positive information will be reported over time by your financial institution to the credit agencies who will enter it into your file, which will gradually increase your rating. “We should not feel discouraged. We see in our offices a lot of people who were able to obtain a card with a guaranteed amount and then were able to gradually increase the limit,” she confirms.
- Once you restore your credit, avoid taking on new unnecessary debt and falling back into a debt spiral.
- Be aware of the reason that prompted you to go into debt and thus hand over the property. Is there something that doesn’t work in your budget? Are you spending more than your income allows? Conduct an in-depth assessment and develop a strategy to ensure your financial capabilities are respected.
- If you take out a car loan, make sure you understand the terms and conditions to avoid unpleasant surprises. When you sign the contract at the agency, you feel some pressure, but take the time to read the document and ask questions if some items are not clear to you.
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