Millions of Americans rely on their vehicles every day. According to data from the American Association of State Highway and Transportation Officials, 79% of workers who own a car use it to commute to work. Many of these drivers also have a car loan. But what happens if you can’t afford your monthly payments? How do you get out of a car loan?
What about if you'd rather not shell out that type of money anymore on car payments every month?
Luckily, you can learn how to get out of a car loan before defaulting. Keep reading to see why you might need to get out of your loan and how to do it. We’ll also take a look at what happens once you’re out of the loan — and how to protect your finances.
When should you consider getting out of a car loan?
There are almost endless personal reasons someone might need to explore how to get out of a car loan. For many car owners, getting out of a car loan comes down to affordability. If you can’t make your car payments, you could quickly lose your car.
Let’s look at some scenarios where you might want to get out of an auto loan.
Job loss or change
Losing your job is a stressful financial downturn — even if you have a healthy savings account. When you lose your job, you immediately lose all or part of your monthly income.
You have to figure out how to pay your bills with the money you already have. A car loan that was affordable when you had your job might now be unaffordable.
Divorce
Whether you go through an amicable split or face spousal disputes, going through a divorce is expensive. The initial costs of the divorce, such as attorney and court fees, could cut into your cash flow.
You might also be going from a dual income to a single income. This could make it hard to cover the monthly car payment.
New child
There are so many things to think about as you get ready to welcome your new child. One you don’t want to overlook is your vehicle. You want a car that’s safe and practical for your growing family.
This could mean you want to get rid of your current car — and loan — and opt for a vehicle that fits your new lifestyle.
Increase in other expenses
A rise in your household expenses could make your car loan unaffordable. For example, inflation could raise your food and fuel expenses. Your new budget may not have enough for your existing car loan.
Or, maybe you recently bought a new house. With the increased mortgage payment, you can no longer comfortably afford your car payment.
5 Ways how to get out of a car loan
The good news is if you’re deciding how to get out of a financed car is that you have options. There are several effective ways to get rid of your auto loan.
However, some methods are better than others — especially when it comes to your credit score and finances. Be sure to carefully compare your choices before getting out of your loan.
Here are the top ways how to get out of an auto loan:
1. Pay the loan in full
The most straightforward way to get out of a car loan is to pay it in full. Paying off your auto loan closes the loan. You’ll own your car outright and will only need to cover routine maintenance, repairs, and insurance costs.
The downside to paying the loan off in full is the cost. If you’re struggling to make your payments, it’s unlikely that you have the money to pay off the loan. And if you do have the cash it would mean tapping into a chunk of your savings.
You should also check to see if your lender has a pre-payment fee. Pre-payment penalties are fees your lender may charge if you pay off the loan before the term is up.
2. Trade in the vehicle
Trading in your vehicle is another way how to get out of an auto loan. Car dealerships usually let you trade in your existing vehicle when purchasing a new or used car.
The value of your trade-in is subtracted from the price of your new car. Your dealer will take over your existing loan and pay it off.
However, there are a lot of things to consider when trading in your car. Here are a couple of important things to think about first:
Your trade-in offer is less than selling it outright
Trade-in offers are usually lower than the price you could get selling your car privately. However, you can use a site like Kelley Blue Book to see what the value of your car is before trading it in.
Doesn't guarantee your next vehicle is affordable
Also, trading in your car doesn’t guarantee that your next vehicle is affordable. You may have to get a new loan for your new vehicle.
But you can reduce the need for a loan by trading in your car for a safe and reliable vehicle that’s in your price range.
You could be upside down in your loan
There’s also the chance that you have negative equity on your car. That’s when you owe more on your loan than the car’s worth. You’ll have to cover the remaining loan or roll it into your new loan.
For example, you plan to trade in a car with a $15,000 balance remaining on the loan. The dealer only offers you $10,000 for the vehicle. You can either pay off the remaining $5,000 or add it to your new loan.
Be aware that adding it to a new car loan means you’re also paying interest on the amount.
3. Sell the car outright
Selling your car privately is another way how to get out of a car loan. Once sold, you can pay off the loan in full.
Generally, selling a car privately is more lucrative than trading it to a dealer. And with online marketplaces, it’s easy to market your car to a wide range of buyers.
There are drawbacks to selling your car yourself, however. For one, you won’t be replacing the car in the transaction. If you rely on your vehicle to commute, you’ll have to find another one on your own.
There’s also more legwork involved when selling your car on your own. You have to take visually-appealing photos of the vehicle and write the listing. Then you’ll have to post it to marketplaces, make flyers, or take out local ads.
You’ll also have to meet with potential buyers to let them check out the car. You may find that the hassle isn’t worth the increased price.
4. Refinance your auto loan
Do you love your current car and don’t want to get rid of it?
You may be able to keep it and make your payments more affordable by refinancing your auto loan. Refinancing is the process of taking out a new loan with better terms. You use the new loan proceeds to pay off the remaining balance of your old loan.
Refinancing can help you take advantage of better loan terms or make your loan more affordable. For example, many people refinance their loans to get a lower interest rate. Alternatively, you might refinance to extend the loan term and lower your monthly payments.
Downsides to refinancing an auto loan
However, taking out a refinancing loan isn’t always the best solution. Anytime you take out a new loan, your credit could take a hit. First, your lender will make a hard inquiry to see your credit report before offering you the loan.
This usually hurts your credit score — at least temporarily.
Secondly, having too many new accounts in a short period can lower your credit score. Lenders may think you have to open new accounts to keep up with your debt.
The effects on your credit score aren’t the only drawbacks to refinancing. You also have to think about how a new loan affects your finances and cash flow.
A longer loan term may drop your monthly payments, but you’ll be in debt longer. You may also have fees for the new loan, such as origination fees, that could offset your potential savings.
Refinancing auto loan example
Let’s say you have $10,000 and 3 years (36 months) remaining on your car loan. You want to lower your monthly payments by refinancing.
You apply for a 5-year (60-month) loan for $10,000. The loan funds pay off your current auto loan and you start making payments on the new loan.
5. Surrender the car voluntarily
Auto loans use your car as collateral. When you can’t make your payments, your lender could take your vehicle to help pay off your debt. Vehicle repossession can cost a lot — to your credit score and your personal finances.
When you know you’re about to lose your car, you may have to consider voluntary repossession. Unlike a regular repossession, voluntary repossession is when you choose to give your car to your lender.
You’ll set up a time and place to hand over the vehicle. Generally, voluntarily surrendering your car is a better option than letting your lender repossess it.
You’ll know when your car is going to be handed over. You could also save money on potential towing or storage fees from an involuntary repossession.
Although surrendering your car voluntarily is one way how to get out of a financed car, you should weigh the cons of it before deciding:
Downsides to voluntary repossession
Voluntary repossession isn’t a magic wand to get out of a financed car. You still owe the money. Your lender will sell your car, but you’ll be responsible for any remaining balance.
Say you owe $10,000 on your loan. Your lender sells your car for $8,000. You still have to pay back the remaining $2,000.
If you can’t pay, your lender could send the amount to a collection agency. Having a collection account on your credit report will hurt your score.
Defaulting on your auto loan
A voluntary repossession is still considered a default on your loan. That means it can stay on your credit history for up to seven years. This mark on your credit score will likely make you a high-risk borrower.
You’ll have a harder time getting a loan and you’ll face higher interest rates. The good news? Your credit report will show that your repossession was voluntary.
You may be able to find a lender who will take this into account when you seek out another loan. While a voluntary repossession should be a last resort, it’s usually better than involuntary repossession.
Now you know how to get out of a financed car! But again, there are some things you should consider first. So let's dive into what you should consider while figuring out how to get out of an auto loan.
4 Things to consider when getting out of a car loan
Regardless of how you get out of a car loan, the process can be complicated. You’ll have a lot to think about, but these tips could help make the process easier.
1. Try to negotiate with your lender
First, try to negotiate with your lender before you decide on how to get out of a car loan. You might be surprised to learn that not all loans are set in stone. Many lenders prefer to negotiate with borrowers rather than go to collections.
Depending on your lender, you might be able to negotiate the terms of your loan.
This is especially true if you’re facing temporary financial hardship. For example, you’ve been furloughed at work. Your lender might be willing to pause your monthly payments or let you make interest-only payments for the time you’re out of work.
2. Know the downsides of getting out of a car loan
Before you decide how to get out of an auto loan, make sure you understand the consequences. Most methods for getting out of a loan will affect your:
- Credit score
- Personal finances
- Means of transportation
For example, refinancing your loan could negatively affect your credit score. However, you’ll still keep your car. You won’t have to worry about finding alternative transportation while looking for a new car.
On the other hand, selling your car to a private buyer could help you get out of your loan without hurting your score. You might even end up with extra money from the sale.
But you’ll have to figure out how to get to work, the grocery store, and other obligations until you get your next vehicle.
3. Consider your options before defaulting
You should avoid defaulting on your auto loan at all costs. To do this, you may have to consider your options to get out of the loan in advance. If you feel that your bills are becoming unaffordable, start making your Plan B.
If you default, you risk damage to your credit score that will take years to repair. In the meantime, you’ll be paying higher interest rates for any loans you get — if you’re approved.
Skip this stress by knowing your options before you can’t make your payments.
4. Avoid overspending on your next loan
After getting out of your current loan, you should start thinking ahead so you can avoid overspending on future loans. The best way to make sure your next car loan is affordable is to:
Make a big down payment
The more money you can put toward your car purchase, the less you have to finance. Saving up for a car now will make it easier to afford when it’s time to buy.
You might even be able to save enough to buy your next car outright, which could be beneficial for a depreciating asset.
Choose a shorter loan
While a longer loan term can help lower your monthly payment, you might end up paying more overall. Longer loans often have higher interest rates, so you’ll pay more in interest over the life of the loan.
Let’s say you have two $10,000 loan options. The first is a three-year loan with a 3% interest rate. Your monthly payment is $221 and you’ll pay $624 in interest.
The second loan is a seven-year loan with a 6% interest rate. You’ll only pay $146 a month, but you’ll pay a total of $2,271 in interest.
Improve your score before applying
A good credit score can help you lower the cost of an auto loan. How? By giving you access to better interest rates and loan terms.
Think about those car commercials that advertise 0% interest rates. If you listen carefully, that’s usually followed by “for well-qualified borrowers.” That means you’ll need a great credit history and credit score to qualify.
However, improving your credit score takes time because the most important factor in your score is on-time payments. The sooner you get started, the longer your credit history will show positive payment history.
Leverage this tips on how to get out of a car loan that’s unaffordable!
There are ways to get out of your car loan if you need to. Whether you can pay the loan off or need to refinance, be sure to consider all of your options.
Knowing what solution is best for your financial situation can help you take action right away and avoid defaulting on your loan.