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Surrendering a car to the lender

Dear Debt Adviser,
My husband and I made a bad decision and financed a car for seven years. I still have two years left before the loan is paid. The vehicle is only worth about a third of what I still owe. My current circumstances have caused me to consider surrendering the vehicle, but I don't know anything about what the consequences are if I do. At any rate I am desperate for a lower payment. What should I do?
-- Tricia

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Dear Tricia,
Welcome to the world of the "upside down" and I don't mean my favorite pineapple cake! The good news for you and your husband is that the mistake you made was only about financing a car. My real concern is not letting the stress of an excessive car payment spill over and into your marriage and lead you to consider surrendering the "old man" along with the car!

Financial lessons can sometimes be the hardest and some of the most expensive to learn, but you have learned a valuable one. A car loan of more than 36 or 48 months (particularly with no down payment) puts you in the position of owing more (sometimes much more) than the value of the car. Let's see if we can make this particular lesson as painless as possible.

First, let me explain what happens when you voluntarily surrender your car for repossession to the dealer or finance institution that carries your loan. Your worries do not end at that point, as many people believe. In reality, they get much worse. The owner of your loan will sell your car at auction for what is often much less than what it would bring at retail sale. To add insult to injury, you may get hit with hefty fees as well. What this means to you is that you are now responsible for the difference between the amount you owed on your loan at the time the car was surrendered plus fees minus the amount for which the car sold at auction. The amount is often thousands of dollars.

You must then determine how you will pay the amount still owed on the original loan. What happens is that you are now paying for a car that you can no longer drive and will never own. One more thing, your interest rate may go up if you have to borrow to pay the difference. The car secured the car loan. Your new loan will not be secured.

An alternative that might yield a lower payment is to trade your current car in for a much less expensive one and see what a four-year loan payment looks like. Another is that if you are a homeowner, you may be able to use the equity in your home to pay off the car note and extend your payments. If you do this however, I suggest you increase payments whenever you can to avoid paying for this car for the next 10 to 20 years!

You mention your circumstances have changed and that you are looking for a lower payment. I'm not sure what those circumstances are, but for you, I believe it would be a major mistake to surrender the vehicle when you have other options.

My last comment is that although you said, "My husband and I made a mistake," your question was, "What should I do?" I strongly suggest that you include him in any solution and make this an opportunity not only to learn a financial lesson, but an opportunity to share a struggle and build a stronger marriage!

Good luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.


-- Posted: Dec. 1, 2004

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