When it comes to buying a car, most people go above and beyond their basic transportation needs. They pay a lot for luxuries: DVD players, navigation systems, automatic everything, enough engine power to race in the Indy 500. Conventional financial wisdom dictates that you should be paying no more than 10% to 15% of your income (including loan repayments or lease payments, vehicle maintenance and car insurance) for this "debt on wheels"; the golden rule is to buy a car that you can pay off within 36 months.

All of this is fine, as long as you can afford it. But what if life throws you a curveball—a layoff, demotion, divorce or any drastic downturn in your financial situation that means you can't maintain your monthly outlay, either because you bought too much car or are leasing a luxe vehicle. Suddenly, you’re staring at repossession at worst and black marks on your credit report at best. What should you do? Let’s consider the options, first for those who own and then for those who lease.

Key Takeaways

  • When time are tough, circumstances may force you to downgrade or get rid of your car in order to make ends meet.
  • If you own your car, you can try to obtain or refinance a loan on it, or sell it privately or to a dealer.
  • If you lease, you can try to swap your lease or else try to trade it in early to a dealership.

Options for Car Owners

Once you are ready to tackle the issue—and the sooner you do so, the better—there are several solutions to consider.

1. Go Back to Your Car Dealer

The first option is to talk to your dealer about trading in your model for a less expensive one. Most dealers want you to stay with the brand and will have options to help you out. Hyundai, for example, has a very friendly return policy.

This strategy works best if your purchase is so fresh you're still enjoying that new car smell. Unfortunately, a vehicle's value depreciates really fast: Even after just a few months of ownership, you may owe more on the car than it's currently worth. 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 trade-in.

2. Refinance the Car Loan

The second option is to look at refinancing your car loan. The best move would be to get a lower interest rate, but you could also score smaller monthly payments by requesting a longer loan period. Some finance companies will extend the loan period substantially, albeit at a higher interest rate. This is not the smartest financial move, but it could tide you over.

3. Sell Your Car

Another good option is to sell your car and pay off the debt. If the car is now worth less than you owe, consider taking a personal loan to cover the difference when you pay back the lender. Financing the difference with a credit card is a bad idea, though, unless the card offers an exceedingly low interest rate.

4. Sell Your Car andYour Loan.

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.

Options for Car Leasers

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.

Similar to a buyer's fourth option above, a lease transfer 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.

Lease-Swapping Sites

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:

1. 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. 

2. Buy It

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. 

3. Sell It

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.

Of course, financial difficulties aren't the only reason you might want to ditch your car These options will work just as well if your only problem is that you're moving to a city where owning a car is expensive and unnecessary.