Question: A little over a year ago, I leased a brand new car but things have changed and I can barely afford it now. Back when I leased the car, with some cash down and my old car as a trade-in, the monthly lease payments were brought down to $235 a month for the 4 year lease. Insurance costs me $135 a month (and cannot be reduced or removed, as per the lease agreement), for a total of $370 per month. At the time, I could easily afford it.
Now I can barely afford it and I just lost my part time job, so things are not looking any easier. I want to just drop it off at the dealership and walk away from it. My credit rating is already an R9, so I don’t care if it hurts my credit rating (or is there something worse that could happen)?
I know there’s a company that matches up people looking to get out of a lease with people looking to take over a lease, but that could cost me a month or two worth of payments while, or if, someone can be found to take over the lease. The car has the less desirable manual transmission – most people want automatic, so I could be stuck with the car for a while. I’m not sure if I can hold out until things get better financially. It’s been a challenge for the last few months and now, short of a lucky turn of events, will be even harder. If I fall behind in my lease payments, the car will be repossessed. Would it be so bad if I just voluntarily gave up the car instead?
I’m thinking of going on a debt management program. Would I probably get slammed with an early termination penalty (whatever that might be). Or on a DMP, is it possible that they would go easier on me?
Answer: In general, if you sign a car lease you are responsible for the payments. If you are not able to make the payments and you voluntarily surrender the car, the leasing company will take the car and sell it, and apply the proceeds to the balance owing on the lease. For example, if you have three years owing on your lease at $235 per month, you owe $8,460 on the lease. If the leasing company sells the car for more than $8,460 (after selling expenses), you will owe nothing. However, if they only get $5,000 when they sell the car, they would pursue you for the remaining $3,460 owing.
The decision for you is this: if you think you will be working soon and will need the car, it may be best to try to keep it. You could call the leasing company and ask them to defer a month’s payment to help you out. On the other hand, if you are sure you cannot afford to keep it, you should ask the leasing company what will happen if you return it. If you know you will lose a lot of money, then exploring one of those companies that matches people wanting to lease with people wanting to get out of a lease may make sense.
Ultimately, if you do suffer a shortfall on the car, a debt management program may be able to deal with the debt. If you cannot pay the debt yourself, other options may be a consumer proposal or personal bankruptcy.