Auto Net Financial News

Repossession and the Toyota Recall

March 3, 2010 by scypher

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How to make the current Toyota recall situation even worse by turning your good credit score into a bad credit score with a voluntary repossession.

A real question

Here at Auto Net Financial one of our customer service representatives recently fielded the following question from a reader:

I have a Toyota Camry and with all the recalls I do not feel safe driving the car, even if they “fix” the problems. I went to try to trade it, and because it’s not a year old and has all the recalls, the car is worth $10,000 less than what I owe. Looking at my credit, I can finance a second car without trading. Someone told me that I should finance a new car and then turn in the Camry to Toyota. He said that it would lower my credit score by 100 points, but what else could happen in this case? He said that I could get a judgment on my credit, but I didn’t have to pay the judgment… is this true?


Going downhill

At first, the question took us by surprise. That’s because here at Auto Net Financial we normally deal with customers who are hoping to improve their credit scores by filling out an application for a bad credit car loan, as opposed to utterly trashing them. After all, if you have really good credit (anyone who was able to finance a new Toyota Camry a year ago through what we are assuming is Toyota Financial Services must have at least one FICO score of 720 or higher), why would you want to kill it with a repossession?

The obvious answer is that this person is afraid to drive her Toyota Camry due to a series of recalls that have recently made the national news as well as caused a series of hearings to be held by committees of both the U.S. Senate and the House of Representatives.

So let’s look at that first.

Toyota recalls

The Camry recalls involve two separate issues: floor mats and sticking accelerator pedals. Here is what Toyota Motor Sales president and COO Jim Lentz had to say about both in the February 15th issue of USA Today:

We have investigated this issue, and have identified two specific causes that we can address and are addressing with our recalls — pedal entrapment caused by floor mats and sticking accelerator pedals. In the case of sticking pedals, we were first able to uncover a defect trend in the U.S. late last October and moved quickly to pinpoint the cause and establish the fix. Dealers are now making the repairs for our customers at a rate of roughly 50,000 vehicles a day.

Lentz goes on to state:

Still, it is worth putting this issue in context. Confirmed incidents of unintended acceleration are a very small fraction of vehicles on the road, and Toyota’s track record for reliability remains strong.

The company has also requested that those customers who still have questions and concerns should contact the Toyota Customer Experience Center at 1-800-331-4331.
The Toyota Customer Experience Center hours are:
Mon – Fri, 5:00 am – 6:00 pm PST
Sat, 7:00 am – 4:00 pm PST

Voluntary repossession

As far as “turning in the Camry” is concerned, we’re afraid that this person’s friend was a bit misinformed. The fact of the matter is, the higher your credit score, the more it will drop if a negative item appears on your credit report.

According to the myFICO web site, someone with a credit score of 780 can expect their credit score to drop nearly 160 points as the result of a foreclosure – which is the homeowner’s equivalent of an automotive repossession. And that is just for starters.

Once the repossession occurs, the lender is legally required to sell the Camry at auction and, at that time, the deficiency balance (the difference between what is owed, plus fees, and the selling price) may very well be equal to or greater than the $10,000 in negative equity that the dealer’s appraisal indicated. If that amount isn’t paid, the lender can then go to court and obtain a judgment against the borrower and, following that, an order of garnishment.

The civil judgment will also appear on the borrower’s credit report with a corresponding drop in her credit score (myFICO estimates a 120 point drop for a 780 score for settling a credit card debt, and a civil judgment is sure to affect a credit score more than a debt settlement).

In all, this means that a beginning FICO score of 780 could now be in the 500 range and, in addition, the borrower’s employer could be receiving a letter from the court requiring them to garnish her wages.

As we see it

Even if this person did have a high enough credit score and the income to afford to buy a second car and turn in the Camry, she shouldn’t do it. Call it what you like, but it would be credit score suicide for this person to choose to do a voluntary repossession on a Toyota Camry simply because of the current recall situation.

For customers who feel as strongly as this, there are a number of law firms lining up for class action suits against the company – a route far more financially responsible than repossession.

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