When buying a new car, it's tempting to go beyond the base model and splurge on some extras. That may include things like DVD players, navigation systems, or automatic everything. With the average new car price hovering just above $40,000, however, it's important to ensure that you can afford your vehicle purchase.
An unexpected layoff or job loss, or another situation that affects your ability to meet your car payments may have you wondering what options you might have to avoid repossession. Specifically, you may be wondering: Can you return a car you financed? The answer is, it depends.
- Unexpected financial situations may affect your ability to make car payments, putting you at risk for repossession.
- If you financed a vehicle purchase through the dealer, they may have specific rules about when you can and can't return a car.
- Leasing agreements may include clauses for returning a vehicle early, though you may pay a penalty to do so.
- Returning a car you financed may have negative impacts on your credit score.
How to Return a Financed Car
If you took out an auto loan to finance the purchase of a new or used vehicle, there are several possibilities for returning it and getting out of the loan agreement, or making your loan payments more manageable.
Reasons for Returning a Vehicle
There are a number of reasons why you may need to return a financed vehicle. Returning a car could make sense in any of the following scenarios:
- You can no longer afford the monthly payments and want to avoid repossession.
- You purchase a new or used car only to realize shortly after that it's a lemon.
- You believe you overpaid for the vehicle and would like to look elsewhere for a car.
- You move to a new city and no longer need the vehicle.
- You simply changed your mind about the purchase.
Trading the vehicle in for a less expensive car is something to consider if you still need a car but can't afford the one you have. You'd still have a car loan payment. But if the vehicle is less expensive, the new payment may be more affordable for your budget than the previous one.
Lemon laws are different in every state so if you're attempting to return a vehicle on the grounds that it's a lemon, be aware of what time limits may apply for doing so.
Can You Return a Financed Car Back to the Dealer?
When you can't afford the payments, returning the vehicle may be a necessity. But before returning it, you may want to talk to the dealer to see what help they might offer. For example, if your financial troubles are only temporary, the dealer may allow you to skip a payment or two and have it added on to the end of your loan term.
If you financed a vehicle purchase through a dealership, it's possible that you may be able to return it. But this will depend on the dealership's return policy and rules. Similar to lemon laws, there may be a time limit on how long you have to return a financed car back to the dealer.
In some instances, a dealer may accept the return of a financed vehicle if it's necessary to avoid repossession. What's important to keep in mind here is that a vehicle's value depreciates quickly. Even after just a few months of ownership, you may owe more on the car than it's currently worth. This could mean handing over cash to get out of the vehicle and the loan.
If your car has depreciated to $20,000 and you still owe $25,000 on it, for example, you will have to pay the difference of $5,000—even if your dealer agrees to the return. So that's something to consider when weighing whether returning a car is the best option.
If the dealership refuses to work with you, consider filing a complaint with the Better Business Bureau, your state attorney general's office, the Federal Trade Commission, and/or the Consumer Financial Protection Bureau.
Ask for a Voluntary Repossession
If you simply can't afford your car payments any longer, you could ask the dealer to agree to voluntary repossession. In this scenario, you tell the lender you can no longer make payments ask them to take the car back. You hand over the keys and you may also have to hand over money to make up the value of the loan.
Voluntary repossession allows you to return a car you financed without being subject to the full repossession process. This could spare you some credit score damage, though a voluntary repo could still be reported to the credit bureaus.
Ask about any penalties or fees you may have to pay for voluntary repossession and how it will be reported to the credit bureaus.
Alternatives to Returning a Financed Car
If your dealer won't allow you to return your car because it's depreciated too much or your reason for returning it isn't covered by the return policy, there may be other things you can try.
Refinance the Car Loan
If the issue with monthly payments is affordability you may want to look at refinancing your car loan. Qualifying for a new loan with a lower interest rate could save you money and potentially reduce your monthly payment.
It's important to consider the new loan term, however. If you refinance into a longer loan term, your monthly payments may be lower. But you could still end up paying more in interest versus choosing a shorter car loan. Be sure to check the best car loan rates before going this route.
Consider using an online car loan refinancing calculator to estimate your potential savings with a new loan.
Sell Your Car
Another possibility you might consider in lieu of returning a car is selling it and using the proceeds to pay off your loan. You'd have no vehicle but you'd also have no car loan debt hanging over your head.
If the car is now worth less than you owe, you may need to take out a personal loan to cover the difference if you don't have the cash to cover the gap with the lender. Financing the difference with a credit card is generally a bad idea unless the card offers an exceedingly low-interest rate.
Have Someone Else Take Over Payments
Finally, you can try to find someone to assume your loan payments along with the car. You can advertise in market places such as Craigslist and eBay Motors to find potential buyers.
The person who buys the vehicle would assume ownership of the vehicle and they'd assume responsibility for the loan as well. But the dealership may require them to apply for financing, complete with a credit check, before they can take over the loan. If they don't have solid credit, this option might not be doable.
Read your loan agreement carefully to determine whether your lender allows for someone else to take over loan payments.
How to Return a Leased Vehicle
If you've leased the car, you're in a somewhat different situation. Obviously, you can't sell it. You can return the vehicle to the dealer, but if it's before the lease expires, you'll likely face some stiff early termination fees. Plus, you will still owe the balance remaining on the lease and—to add insult to injury—also lose the upfront money originally paid.
However, drivers who want out of their contract ahead of schedule can take heart: There are a few options that allow you to circumvent the usually harsh termination penalties. One frequently overlooked path—and often the least expensive choice—is to transfer the lease to someone else.
It works like this. Suppose you have two years left on a three-year lease. Whoever buys your lease agrees to make the remaining monthly payments. While some finance companies don’t allow such transfers, the vast majority do. The trick is finding someone interested in taking the reins from you.
Fortunately, several websites make that job a lot easier. Sites like Swapalease and LeaseTrader provide listings that help match existing lessees with potential lease buyers.
These trades can be just as advantageous for those assuming the lease. For one thing, they won't have to put up a sizable down payment for the vehicle, which the original leaseholder has already done for them. Furthermore, some people only need a car for a relatively short period of time—say, one or two years. Taking over someone else’s lease is an ideal way to obtain a relatively new car for such a limited time.
Keep in mind that getting someone else to assume your lease usually isn’t free. Using a trading website to facilitate the transaction will usually cost between $100 and $350. However, that’s a fraction of what most leasing companies will charge should you decide to return your vehicle early. Some finance companies also assess a lease transfer fee—typically around $300—when you arrange a swap.
To sweeten the pot, you may want to consider offering an up-front incentive, say $500, to lower the payments the person you transfer to will need to make.
Before deciding to register with a lease-trading website, it’s important to perform your due diligence with both the company that holds your lease and the website. Here’s what you’ll want to know:
- Does your leasing firm allow transfers?
- Does the buyer take on full financial liability for the lease once it's transferred? You could, for example, be liable if the buyer fails to make lease payments.
- If you (the original leaseholder) maintain some responsibility after the transaction, does the lease-trading website perform a credit check on the buyer?
Alternatives to Lease-Swapping
Depending on the extent of your financial crunch, there are other possible ways to unload your leased vehicle. These include:
Trade It In
Sometimes manufacturers will allow you to exchange your current automobile for a different model. This option is a mixed bag. In many cases, you still have to pay the early termination fees, although they’re rolled into your new payments. In other words, the pain is spread out over a longer period of time.
Often, the leasing companies will allow you to buy the car before the lease runs out. This is a course you might want to take if, for instance, you’ve passed the lease’s mileage allowance and you'd prefer to hang onto the car long-term anyway. The company should have a payoff schedule showing how much you’ll have to pay to make the car yours.
Another alternative is buying the car in the middle of the lease, if it's allowed, and selling it to another party. Be forewarned: The payoff amount might be higher than the car's market value, making the transaction a loss. But if selling the automobile is less expensive than the early termination fee, it’s something to consider. Do the math.
The Bottom Line
When financial problems prevent you from making payments on the car you’ve bought or leased, you have several alternatives. All stakeholders—the dealer, the lender, and you—can minimize damage if you diagnose the condition quickly and act on it swiftly.