Voluntary Repossession: A Cautionary Tale

Have you ever impulsively bought a car only to find out later that you cannot afford it? This is a situation that many of us face, often due to momentary excitement or a lack of financial planning. I recently encountered a similar scenario, and in this post, I will share my experience and offer some advice on what to do if you find yourself in a similar situation.

My Experience with Voluntary Repossession

Several years ago, I made a similar mistake. I purchased a car that I could afford at the time, but then the economy took a nosedive, and I found myself unable to make the monthly payments. Here's what I did to get out of the situation:

I went to a dealership and traded my car in for a less expensive model on which I could lease with no initial payment. I leased the car instead of buying it outright because it was a short-term solution, and the lease payments were significantly lower. With the lease, I planned that at the end of the term, all the negative equity from the trade-in would be eliminated, providing me with a fresh start within two years without resorting to a repossession. To manage my finances better, I cut down on unnecessary expenses, such as eating out and spending on vanity items.

Although this approach worked for me, I want to stress that it is not a general piece of advice. Each financial situation is unique, and what may work for one person might not work for another. Always consider consulting a financial advisor before making any major financial decisions.

The Aftermath of Impulsive Car Purchase

Your situation seems to be a bit different from mine. You have taken possession of a new car, which was likely financed through some form of personal contract lease (PCL) or personal contract purchase (PCP). If the car is new, it is instantly worth a lot less than its original value, especially considering the depreciation that occurs when it is driven off the forecourt. This leaves you in a precarious financial position.

Let's break down the situation to illustrate why:

New car: $20,000

Deposit: $2,000

Purchase price less car allowance (PCL): $10,000

Balloon payment (PCP or HP): $18,000

Total payments split over 36 months: $11,000 (PCL) $18,000 (balloon payment) $29,000

After taking possession of the car and driving it off the forecourt, the car will be worth less, perhaps as low as $12,000. If you return the car, the finance company could sell it for that amount, but they might still charge you the deposit of $2,000 and the remaining debt of $17,000 (since $10,000 has already been paid towards the balloon payment).

Thus, you could end up owing a minimum of $19,000, with no car to show for it. This would be a significant financial burden and could severely impact your credit score.

Steps to Take if You Cannot Afford the Car

If you find yourself in this position, there are several steps you should consider:

Communicate with the Finance Company: Explain the situation directly to the finance company. They may offer you different options, such as a temporary payment deferral, a modified payment plan, or even a buyout of the remaining balance. Seek Professional Advice: Consult a financial advisor or a credit counseling service. They can provide you with personalized advice based on your financial situation. Consider a Voluntary Repossession: This is a last resort and only applies if you have paid over half of the payments on a personal contract lease (PCL) or hire purchase (HP). Otherwise, the finance company will likely want you to pay off the entire debt.

Ultimately, it's important to take responsibility for your financial decisions and learn from this experience. Avoid impulse buying, especially when it comes to large purchases like a car, unless you are financially prepared for it.

Conclusion

The lesson here is that making a significant purchase like a car should always be a carefully thought-out decision. Consider your financial situation, budget, and long-term plans before making any commitments. If you do find yourself in a situation where you cannot afford the car, take proactive steps to resolve the issue rather than simply giving it back.