There was a time when you loved your car — when you happily drove it home from the dealer. But that love has grown cold, and now you wish you’d never laid eyes on it. You are chained to it by a payment book, much as you wish you were not.
We’ve had readers ask us if they can just “give the keys back” and get a car that IS reliable — one that they’ll feel better about driving their kids around in. And while just returning the car sounds like the dream solution, it can come with as many unanticipated problems as the vehicle you’re looking to unload. Assuming you have no recourse under your state’s lemon law, or your situation doesn’t pertain to a dealership’s return policy — if it has one — returning the car can be tricky and could have credit implications. This is something you’ll want to consider, especially if you plan to lease or purchase another car once you give the other one back.
To start with, returning the vehicle to the dealer won’t erase your debt, even though it may feel to you as if you are simply returning it.
“Technically, if you give the car back it is the same as a repossession,” explained automotive finance expert Matt Briggs, co-founder and CEO of CreditJeeves.com. “Keep in mind you have a legal obligation to pay the terms of the loan and the car dealer is typically not the finance company who holds the loan (unless they are buy here pay here). Either way you cannot simply ‘give back’ the vehicle to dealer and walk away,” Briggs said in an email.
Because it would be considered a repossession, the exact same thing would happen as does with a traditional repossession. That is, the car would be sold at auction, and you would be responsible for the difference in what the car brought at auction and the amount you still owed on the car, plus expenses involved in this process (towing, storage, repossession, title and sale). So, if you leave the car at the dealership, you still owe the debt (possibly more than the clunker is worth), but you don’t have a vehicle.
If all that makes it sounds like it would be simpler and cheaper to just sell it yourself, that’s precisely what Briggs suggests: “Most repossession auctions the cars sell for a much lower price than the retail value, so you may end up owing more then you would if you sold it private party (using a website like AutoTrader, eBay or Cars.com) or if you traded it in on a different vehicle.”
As far as damage to your credit, a car repossession will stay on your credit report for seven years after the original account went delinquent, Experian says. (You can see how your debts affect you by getting your free credit report summary on Credit.com, which will give you an explanation of what factors influence your scores.)
There is a way, however, to force a dealer to “eat steel,” said Eugene Melchionnne, a Connecticut bankruptcy attorney and contributor to Credit.com, and that is by surrendering the car and discharging the debt in bankruptcy. He explained via email: “There is also a process for ‘cramming down’ the debt to the value of the car in bankruptcy and in a Chapter 13 case, you can spread the balance owed over an extended period of time,” he said in an email. “For example, if the car loan is for $20,000, but the car is worth $10,000, the loan can be reduced to $10,000 and if there are say, four years left to pay at $500/mo., the payments to can be spread out to a maximum of five years on the lowered balance resulting in $330+ a month savings.”
Still, for most of us, simply driving the car back to the dealership and handing over the keys, however tempting, is not a workable strategy. So after you dig yourself out of this mess, do as much due diligence as possible before you buy next time.
“Bottom line,” Briggs said, “you have a legal obligation to pay the car loan in full so make sure you are getting a good deal before you sign on the dotted line.”
More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Can’t Make Your Car Payments
- Top 5 Worst Car Buying Mistakes