How to Get Out of Your Car Loan
The day you buy a new car is a big day — you successfully navigated the dealership and financing pitfalls and brought your new baby home. So if you need to figure out how to get out of a car loan, you may be feeling disappointed or overwhelmed.
Maybe your job or financial situation has changed. Perhaps you can’t keep up with other monthly payments and you’re having a hard time staying above water. You may have a bad car loan with terms that aren’t in your favor.
While it’s not easy, we’ll talk about how to get rid of a bad car loan and explore some of your options.
5 ways to get out of your car loan
Once you sign your name on the dotted line, you usually can’t return a car after signing the loan documents and sales agreement. You’ll have to come up with other ways to get out of your car loan.
Your options for getting out of a car loan will depend on why you want to get rid of your car loan and whether you want to keep the vehicle. For example, if you’re struggling to make the payments, your options are different than if you simply want a better interest rate.
1. Pay off the car
The best way to get rid of a car loan is to pay off the balance of the loan. Check with your lender to see if a prepayment penalty will apply. If not, you can make extra principal payments to pay off the loan balance early. Then you will own the car outright and can keep it, sell it or trade it in.
When you pay off the loan, the lender will send you a letter confirming that the loan is satisfied and the lien will be removed from the electronic title. You may receive the title in the mail, depending on your state. Of course, if you’re having trouble making payments, paying off the loan early may not be a realistic option. You could cut other expenses or boost your income to erase the debt faster.
2. Refinance your loan
Maybe you’ve gotten a new job with a higher salary or perhaps you’ve worked to improve your credit score. You may be able to refinance your debt at lower APR or longer term. The APR (or annual percentage rate) is the interest rate plus any additional fees incurred for borrowing the money. Longer terms, such as 84-month auto loans, are becoming more common
If you take this route, understand how your new terms will affect the overall amount you pay for the car. You may get lower monthly payments with a longer term, but you will pay more in interest over the life of the loan. If you’re having trouble making the current car payment and your credit score hasn’t improved, it’s not likely you will qualify for a lower interest rate.
Use our auto refinance calculator to compare monthly payments, months to payoff and total interest paid and see if you can save with refinancing.
3. Sell the car
You can sell the car and use the money to pay off the loan. Contact your lender to let them know what you’re planning and get the payoff amount needed to satisfy the loan. If you trade in the car at a dealer, they will handle the transfer process and paperwork. You’ll likely get more money from a private sale, but you’ll have to do all the work.
Learn more about how to sell a car with a loan.
4. Renegotiate the terms of your loan
Don’t wait until you find yourself unable to make your monthly payment. Call your lender to negotiate a new plan. They may be willing to help if you have a history of on-time loan payments. The lender may offer a forbearance or defer payments for a brief time, or they may offer options such as a lower interest rate or longer payment terms. They won’t forgive any principal or interest you owe.
Contact your lender to see what options they offer. Have a solution in mind — know what monthly payment or terms you can afford or the length of a short-term forbearance you need.
5. Trade in the car
Visit a dealership to see if you can trade in your car for a less-expensive vehicle. Use online sites like Kelley Blue Book and NADAGuides to check the value of the car. If you are upside down on your car loan, this means you have negative equity and owe more than the car is worth.
If you trade in the car and don’t have enough money to pay off the loan, the dealer will add the negative equity to the loan on your new car. The monthly payment will include the negative equity from the first car and the loan for the second car, so your loan amount will be larger than it otherwise would be for the second vehicle by itself.
What NOT to do with an auto loan
Some options for getting out of a bad car loan could damage your credit score, impacting your future creditworthiness.
Voluntary repossession
If you’ve fallen behind on your payments, volunteer to surrender the vehicle to the lender. Your credit score will take a hit, but it’s better than a full loan default. You may save on paying fees involved in a default repossession. Contact your lender to set up a place and time to turn in the vehicle. This option should be considered only as a last resort.
Default on the loan
If you stop paying or underpay the loan, you will go into default. The lender will likely repossess the car, which will impact your credit report for up to seven years. There may be some additional fees for the related costs. Lenders would rather help you find a way to keep the loan and the car, so call them before it gets to this point.
How to avoid an auto loan you can’t afford
Educate yourself to avoid getting a bad auto loan you can’t afford. Get preapproved for a loan before visiting the dealer. With a firm offer in hand, you can feel confident that you understand the terms of your loan before purchasing a car. By filling out a single form with LendingTree, you may receive up to five auto loan offers.
Use an auto loan calculator to check loan costs and see the effects of changing the length of terms and down payments. Consider making a larger down payment to make the monthly payment more affordable and avoid being upside down on the loan.
Frequently asked questions
You can volunteer to have your car repossessed, which will damage your credit score. Otherwise, your options for getting out of a car loan are to pay it off, sell it, trade it in, or refinance the car.
It all depends on how you do it. Defaulting on or surrendering the car will hurt your score, but paying off the loan will cause only a short-term drop.
Yes, you can sell a car that has a lien, but it can be tricky. Check with your lender to see what the payoff amount will be and confirm the steps you’ll need to take.