How to Get Out of Your Car Loan
When you need to know how to get out of a car loan, it can be tricky to find helpful information that you can use to move forward. Whether your car is upside down, you need to free up your debt obligations or your life changes warrant it, there are ways to get out. What’s great is that some of these ways to get out of car loans can still protect your credit and financial well being from taking any damage from banks, creditors or lenders.
How to get out of a car loan
When you buy a car that you can’t fully pay for in cash, you take out a loan. A lender gives you the money to buy the car upfront and you pay that money back with interest and fees over time in smaller monthly payments.
If you find yourself in a position where you can’t pay any more or need to get out of the loan, it’s a complicated spot. You’ve signed a contract and are legally bound to paying that money back. If you choose to stop paying, you’ll end up with a ruined credit score, a repossessed car and possibly a lawsuit from the lender.
Thankfully, there are ways to get out of a car loan and avoid all of these adverse outcomes.
1. Consider selling your car
Depending on your car’s value, you may be able to get entirely out of the loan by selling it. If you owe $5,000 and can sell the car for $6,000, you can close the deal, pay off the loan and still have $1,000 in your pocket.
If your car is upside down (owing more than the car is worth), though, selling won’t completely get you out from under your loan. You can still sell your car, but you will need to find a way to cover the remaining costs, like taking out a personal loan or refinancing the remaining debt.
Keep in mind, if you sell your car, you still need to have a transportation plan to get to work and around town.
2. Refinance your car loan
Refinancing your car loan is a great option when you still need your car but are struggling to keep up with the payments. When you refinance out to a longer-term, it can dramatically lower your monthly payments. This will increase the total cost you pay over the life of the loan, but it can protect you from defaulting and getting your car repossessed.
According to Experian’s State of the Automotive Finance Market Report (Q4 -2019), the average interest rate for all new car loans is 5.76% and 9.49% for all used cars. When you break this down by credit score, it paints a clearer picture of what you can expect. For prime credit scores (661 – 780), rates average 4.75% for new and 6.15% for used. For non-prime (601-660), rates increase to 7.55% for new and 19.85% for used. For people with just above a 500 credit score, those rates rise to 11.51% and 16.88%, respectively.
Keep reading: Should You Ever Refinance a Car Loan?
3. File for bankruptcy
If the rest of your finances are in bad shape and none of these other options work, you may want to consider filing for bankruptcy. While this is never an ideal move, it may be wise to throw in the towel and start over rebuilding instead of dragging out the inevitable. Before you do this, though, make sure you talk to several financial professionals who can weigh out all of the pros and cons. Filing for bankruptcy is a major financial move with implications that will last for years.
4. Negotiate with your lender
While you may think that auto lenders want you to default on your loans, this is not the case. Repossessing vehicles is expensive. Additionally, when you default, the company stops getting paid. The most lucrative way forward for an auto lender is to help you find a way to continue paying, even if it means making some concessions.
“Right now many consumers are having problems, and lenders can only choose between being flexible or assuming huge losses,” said Michael Sullivan, personal finance consultant for Take Charge America.
Ask for forbearance. Ask for a hardship plan. Ask to have interest rates lowered and penalties waived. Ask for every concession you can think of.
While getting out of your car loan may seem like the easiest approach, asking for help from your lender might be a better way forward. Many lenders have programs already in place to help you stay on track when financial times get tough. The only way to know if these programs exist is to ask.
“If you aren’t comfortable doing all that, call a credit counseling agency and ask for help.”
5. Take on a new loan
One way to get out of your existing auto loan is to take on a new loan. Taking on a new loan takes two forms — refinancing or debt consolidation. Refinancing has been discussed already, but debt consolidation may be a new term. If you have several outstanding debts, you may be able to roll them all into one new loan. This new loan could help you save on overall interest costs or could lower your monthly payment — whatever your goal is.
Keep Reading: Best Places to Get an Auto Loan
What are auto loans?
An auto loan is a form of borrowing that grants you access to a lump sum of money upfront to buy a car. In return for this early access to the money, you agree to pay the money back in installment payments over time.
In addition to the money you borrow, you pay a little extra in interest and fees as the cost of borrowing. A whole host of different factors determines the extra cost in interest and fees that you pay. These factors include your credit score, past borrowing habits, your current financial situation and what the lender is willing to offer you. When negotiating your loan, the three biggest factors you’ll discuss are the loan amount, the annual percentage rate and the loan term.
- Loan amount – The loan amount is the total amount of money you need to borrow and will have to pay back (not including the cost of borrowing).
- Annual percentage rate – The annual percentage rate (APR) is the cost of borrowing that includes your interest rate and any fees that you are required to pay.
- Loan term – Your loan term is the amount of time that you have to pay back your loan. Generally, you are expected to make one monthly payment for the duration of your loan term.
Keep Reading: What Are 0% APR Auto Loans?
Best auto loans of 2020
If you’re looking for a new auto loan or to refinance, there are many great options on the market to choose from.
- Lightstream: New car rates as low as 2.49% APR w/AutoPay
- ClearLane: Helps with buying a currently leased vehicle
- Carvana: Extensive network of 15,000+ vehicles
- Capital One: Auto Navigator helps to streamline the entire process