Access to a vehicle is essential for many Canadians - but it can be expensive. Luckily, there are financing options available to help buyers afford the cost of getting a vehicle. But, things don't always go according to plan. There may be times you’ll need to return your financed car, even if you haven’t yet paid it off in full.
The process for returning a financed car can be complex, so you should know what options are available. For example, missing a car payment or returning the car without paying off the loan may result in negative effects on your credit score. It doesn't always have to have a negative outcome. If there's an issue with the car such as a safety recall or major engine failure, you may be able to return it without penalty.
Knowing when and how to return a financed car can help you save money, protect your credit score, and keep your finances in check. Let's explore the process in more detail.
When Should You Return a Financed Car?
If the car is no longer working properly, damaged beyond repair, or you can't keep up with your payments due to financial hardship, returning the car voluntarily may be the best option.
Below, we've listed some scenarios when returning a financed car may be an option:
1. Unforeseen job loss or income reduction
If you lose your job or experience a reduction in income, continuing to make payments on your car loan may not be feasible. As a result of this financial emergency, returning the car is a sensible option, so you don't fall behind on other bills.
If you've missed a few payments already, you can also speak to the lender about suspending or reducing your payments for a specific period. However, this is only possible if the lender agrees and you should be prepared that it may still have an impact on your credit score.
2. Vehicle recall, safety issue, or major engine failure
If there has been a recall, or safety issue with the vehicle, or if the car is continually needing costly engine repairs, then you may be able to return the car without any legal or financial repercussions.
Although most recalls are handled by the manufacturer, frequent engine problems can be expensive to fix, especially if you're not covered by warranties. In this case, it's best to contact your lender and explain the issue in detail. You'll need to provide any relevant paperwork like repair bills or technical reports from auto mechanics.
3. Lifestyle changes
If you've experienced a major lifestyle change — such as relocating to a new city or growing your family — then returning your financed car may be the best option. Whether you need to make room in your budget for a larger vehicle or simply can't afford the payments anymore, it may be worth considering.
But, before making this decision, contact your financing provider. Ask about their policy on returning a financed car, and if they will allow you to return it without any additional payments. You may also want to look into selling the car yourself or trading it in for a different, more suitable model.
4. You want to avoid repossession
If you've been unable to make timely payments, your lender may decide to repossess the vehicle. As a result of repossession, you'll lose the car and will still be liable for any outstanding loan amounts plus associated costs.
Repossession is usually involuntary, meaning the borrower has no control over it. You may want to voluntarily return the car to avoid more severe financial consequences or other legal action.
What is a Voluntary Repossession?
Voluntary repossession occurs when someone willingly returns the financed car to a lender with the agreement that the debt isn't paid in full. This process should be used as a last resort when all other options have been exhausted.
It's best to speak with your lender if you're considering voluntarily repossessing your vehicle, so you understand how it will impact your credit score and any additional charges you may incur.
The process of voluntary repossession varies by lender, but generally involves the following steps:
Contact your lender and explain that you are voluntarily returning the financed car.
Make sure to get written confirmation of this agreement and an understanding of any additional fees or charges that may apply.
Drop off the vehicle at a predetermined location (possibly the dealership where you purchased it or a different location specified by your lender).
Check if there are any additional charges like late payment fees, repossession costs, or remaining loan balance.
Get a receipt for returning the car and make sure to keep all documents related to the process in case of future questions/disputes.
Potential Consequences of Voluntary Repossession
Although voluntary surrender of a vehicle has less serious impacts than involuntary repossession, it can still lead to hefty fees, credit score damage, and legal action
Some potential repercussions of voluntarily repossessing a car include:
Deficiency Balance & Late Fees
When you return a financed car to the lender, they may charge you a deficiency balance if the loan isn't paid off in full. This is essentially the difference between what you owe and what the car is worth (minus any applicable fees).
If you refuse to pay the deficiency balance, your lender may take legal action to recover the money. You could also be charged late payment fees or other additional charges depending on your agreement with the lender.
Credit Score Damage
Voluntarily repossessing your car will likely hurt your credit score. In most cases, the lender will report the repossession and it can stay on your credit report for up to seven years.
The exact impact on your score depends on several factors, including how many payments you've missed and if you've had other issues with credit in the past.
Other factors that can damage your credit score include:
Missed loan payments: Your debt payment history is a large factor in your credit score. If you miss payments, it can be seen as a sign of financial instability and will likely cause your credit score to drop.
Late payments: Much like a missed payment, late payments can also hurt your credit score because it reflects negatively on your ability to pay bills on time
Charged-off accounts: A charged-off account means that the lender has opted to stop collecting payments and write it off as a loss. This can be damaging to your credit score because it’s another signal that shows you’re not reliable when paying back debt.
If you’re behind on your car payments or have failed to pay the deficiency balance after voluntary repossession, your lender will likely turn the debt over to a collection agency. This means that you'll probably receive multiple phone calls and even letters from these agencies asking for a payment to be made.
When your debt is turned over to collections, your credit score will drop - and it can be very difficult to improve quickly. The best solution is to try and negotiate a payment plan with the collection agency to avoid having your credit score suffer further.
Alternatives to Voluntary Repossession
Sometimes, returning a financed vehicle is the only option. However, before making that decision, you should consider all other alternatives. There may be a more suitable option for you.
Here are some alternatives you can explore before returning your financed car:
Negotiate with the Dealer/Lender
You can try to negotiate with the dealership or lender to extend the due date for your payments, postpone due amounts until the end of the loan, or even set up a payment plan.
Some negotiating tips include:
Be confident. Speak about your financial situation in a clear, professional manner and let them know that you’re open to compromise.
Have a plan prepared ahead of time, but be willing to negotiate the terms.
Don’t accept the first offer they make - take some time to consider it, ask questions, and make sure that it’s the best option for you.
Be prepared to explain why you need more time. Perhaps explaining any extenuating circumstances can help, such as job loss or medical bills.
It may be possible to refinance your loan with either the same lender or a different one. This would lower your monthly payments and give you more flexibility in terms of payment. Of course, refinancing is not available to everyone and can be difficult for people with low credit scores.
If you feel comfortable selling the car yourself, this could be a great option. Selling it yourself would help you cover some of your loan balance and reduce the amount you owe.
Selling privately generally ensures you get the most money from the sale, as dealerships typically purchase cars for far less than they’re worth. Of course, if the car is worth less than what is owed on it (an upside-down loan), then you will still need to pay off the difference when the sale is finalized.
Consider iCash Before Returning a Financed Car
If you're in a difficult financial position, voluntary surrender of your vehicle isn't your only option. If you continue to find yourself in a position where you're unable to make timely car payments, consider iCash. As a leading online lender, iCash provides short-term financing options, including car repair loans and other instant loans to help reduce financial burdens to all customers, regardless of their credit history.