Financing may be an affordable way to purchase a car without paying for it upfront, but it can be difficult to keep up with car loan payments if your financial situation changes. Returning your financed vehicle isn’t as simple as most people think.

So, can you return a financed car without penalty? Returning your car oftentimes comes at a cost, but there are many alternatives you can explore. In this guide, we’ll walk you through your options to help you determine what you can do if you no longer want to keep the car.

Can You Return a Financed Car Without Penalty?

You can’t return a financed car without paying some sort of penalty for doing so. However, if you’re facing financial hardship and are unable to make payments, it's best to be proactive about your situation and talk to the dealership or lender as soon as possible to explore your options.

The penalties you may have to pay for returning the car will vary based on the lender’s policy and your financing agreement, but here’s what you can expect in most cases:

  • Early termination fee: The lender can charge an early termination fee if you end the contract before the end of the term to cover administrative costs and lost interest.
  • Negative equity: If you have an upside-down car loan, you’ll be responsible for paying the difference between the car’s value and what you have left on the loan amount.
  • Credit score impact: When you return the car before the loan term ends, it’s technically considered a breach of the loan agreement and can lower your credit score.

Common Reasons To Return a Financed Car

While you can’t return a financed car without penalty, many buyers may have no other option due to changes in their financial situation. People opt to return the car for several reasons, such as:

  • Buyer’s remorse or regret for overpaying for a vehicle they didn’t really need or couldn’t afford.
  • Finding out they have a lemon car
  • Moving to a new city where they won’t need a car
  • Job loss, reduction in hours, or illness which makes it difficult to keep up with payments
  • A decline in health or physical injury that results in a significant reduction in the physical ability to drive a vehicle safely

Alternatives To Return a Financed Car Without Penalties

If you’re looking for alternatives to returning a financed car, there are many options to explore, depending on whether you’ve purchased or leased a car.  

Trade the Car In

If you’re not happy with the car you currently have, the best option would be to trade it in for a less expensive vehicle. Your dealership will apply the trade-in value towards the loan balance, and you can finance a new car, ideally at a lower payment. You can check the trade-in value of your car online at Kelley Blue Book.

Keep in mind that if you owe more than the value of your car, you’ll have to cover the excess loan balance. Add up all your costs carefully to determine if it’s financially wise to do this.

Sell the Car

You can sell the car privately to another driver to pay off your outstanding loan. This may take some time and effort since you’ll have to advertise the car and evaluate offers. This may be a good option if you’re able to sell the vehicle for an amount that’s equal to or more than the remaining loan amount.

You can repay the loan with the proceeds of the sale, and you won’t have to worry about making payments.

Transfer the Car Lease

Leasing a car works differently than purchasing one. When you return a leased car before the end of the term, you’ll have to pay an early termination fee and outstanding lease balance, and you may lose your initial payment and/or security deposit.

An alternative is to transfer your lease to another driver to avoid these penalties. Use lease-swapping sites to find a potential buyer. Check with your leasing company to see if they allow transfers. Once you transfer the lease, the buyer will then be fully responsible for it.

Negotiate With the Dealership

If you want to return the car because you can no longer afford the monthly payments, speak to the lender as soon as possible. In some cases, the lender may be willing to negotiate with you to modify the terms of the agreement so you can keep the car if you’d still like to drive it.

You may request an interest rate reduction, an extension of the loan term to make the payments affordable, or a temporary hold on the payments (referred to as a “loan forbearance”).

Refinance Your Loan

Another alternative to returning a financed car without penalty is by refinancing your loan. If your credit has improved since you took out the original loan, you may be able to get a lower interest rate or better terms when you refinance the car loan. However, if you have bad credit, it may be difficult to refinance.

While refinancing is a good way to make payments more manageable, it’s only an option if your credit score has improved and if you’re able to get more favorable terms. Check your credit report to see if you’ll qualify to get a better rate, and carefully evaluate your new loan to ensure the new payments will be affordable.

Consider Voluntary Repossession

As a last resort, you can consider voluntary repossession if you can no longer make payments on the loan. When you give up your vehicle voluntarily, the lender will resell it to recover the amount you owe.

If the car sells for less than the outstanding auto loan amount, you’ll be responsible for paying the deficiency balance. Keep in mind that if you don’t repay the balance, the lender can turn it over to a collection agency.

Ask for Assistance

“The easiest solution might be to request a deferral or forbearance on your loan payments from your lender for 6-9 months while you get a better handle on your cash flow and finances,” suggests Brad Reichert, financial expert and founder and managing director of Reichert Asset Management LLC. “You could also ask a relative or a good friend if they would be willing to buy your vehicle or help you with monthly payments on it until you get back on your feet financially,” says Reichert.

Recently Bought Cars: Options To Return Your Car Without a Penalty

While the options we’ve listed above are for cars that have been purchased or leased for a while, what options do you have to return your car without a penalty if you’ve just recently purchased it? Depending on your dealership and your state, there may be two options.

Use the 3-Day Right To Cancel a Car Purchase

While there’s no federally mandated “cooling off period” for vehicles, specific state laws, lemon laws, and special circumstances may apply. For example, California law requires sellers to offer a contract cancellation option for used cars that cost less than $40,000.

If you’ve purchased a contract cancellation option, you may be able to return the car within two days without having to pay a penalty.

Return the Car to The Dealership Within 30 Days

Many dealers offer a return policy that allows you to return a financed car without penalty within a certain number of miles driven or days since purchase. This is the best way to return a car without the costs.

Not all car dealers offer this option, however, especially those selling new cars because the value depreciates as soon as the vehicle leaves the lot (because as soon as a sales contract is signed and the vehicle is titled in the buyer’s name, it’s considered a “used” vehicle from then on). However, if you’ve purchased a car from an online dealer or retailer, there may be a return policy.

Return a Financed Car Without Penalty

Financing a car is a major financial decision, so it’s important to plan ahead and make sure the numbers fit your budget. While this can help you avoid a situation where you can’t make payments, your situation may change.

While you can’t return a financed car without penalty, there are other alternatives available, such as selling your car, refinancing, and transferring your lease to someone else.