How to get out of your car loan (2022)
If you need to withdraw from your car loan, there are things you can do. These include negotiating with your lender, refinancing your car, selling your car, or voluntary repossession. Be aware that many of them do not eliminate your car loan payment, but give you access to different terms and payment amounts.
1. Negotiate with your lender
When you’re in a tough financial situation, the first thing to do is call your lender and discuss your options. You are not the first borrower to go through difficulties. Lenders have policies in place for this, and you may be able to negotiate a break in payments, known as forbearance.
Your current lender may also be able to change your monthly car payment amount in hopes that you will return it later. It can help to show the reason for the difficulties and explain how you can make higher payments in the future.
Are there auto loan forgiveness programs?
Lenders are unlikely to completely cancel your loan unless you return your car (which we’ll discuss later). They can work with you on your payment size or due date, loan terms, or deferral instead. If you declare bankruptcy, you will have to return the car because the lender still has a lien on the vehicle even if the loan is cancelled.
Can someone take over my car loan?
Someone can’t just take over your auto loan with the exact terms you have. A minority of lenders allow car loan transfers, but the secondary owner must apply for the loan and be approved. If your lender won’t allow a transfer, which is likely, you may be able to refinance the loan in the other person’s name or have them co-sign a refinance loan and cover the payments.
2. Refinance your car loan
The second best option is to refinance your car loan. In an ideal situation, you can get a lower interest rate now than when you bought the vehicle. This way, you can get a lower monthly payment and save money on the refinanced auto loan.
However, you may not be able to get a better interest rate, especially if you are behind on your payments. You can still refinance your car with the same or even higher interest rate than before, but you’ll end up paying more for the car.
The advantage of refinancing is that you can get a lower payment and make your car loan a little more manageable. You will keep the car and you will have a new loan with new conditions. In many cases, you will also benefit from a short break in payments, usually between 30 and 90 days.
3. Pay off your loan
If it’s feasible for you, paying off your loan is one way to get out of your car loan and keep your credit score intact. Here are some ways to pay off your car loan early:
- Pay the remaining balance in full
- Make periodic payments above the required amount
- Round your payment amount to the nearest $50 or $100 each month
What’s the best way to pay off a car loan?
If you want to pay off your car loan, make sure there are no prepayment penalties or that the penalties don’t exceed what you’ll save in interest. Paying the remainder of the loan in cash will save you the most interest, but you may also benefit from larger periodic payments.
4. Sell your car
Another way to get out of your auto credit is to sell your car. Ideally, you owe less than the value of your car and you can pay off the loan with the sale. Before listing your vehicle, contact your lender for a reimbursement amount.
If your lender is a bank, you may need to complete paperwork at a bank with the buyer. If you used an online lender, you may need to complete the sale at a partner bank’s location.
You’ll get out of your car loan once you pay off the lender and close the sale. If you are upside down on the loan, you will need to cover the negative net worth yourself or take out a personal loan to do this.
5. Opt for voluntary take-back
In some cases, refinancing your car may not be enough to get you out. To completely get out of your car loan, you can return your car to voluntary repossession.
Can you return your car to the finance company?
With a voluntary repossession, you give the finance company possession of your car. It’s better than a standard repo because you work with the lender to return a portion of what you borrowed through the value of the vehicle. However, this is not an ideal option because you are not repaying the loan in cash.
How to return your car without ruining your credit
Unfortunately, giving your car to the lender will hurt your credit. It won’t hurt your credit as much as a full repossession, but you’ll still take a hit. To have a better result, make sure you are not upside down on the loan. You may also get a better result if you can afford to pay off part of the loan when you return the car.
6. Last resort options
These last two options should be avoided whenever possible: default on the loan or file for bankruptcy.
Default on loan
If you don’t do anything long enough, you’ll simply be in default. This is the worst case scenario for a car loan. Default forces you to take no action and ignore calls from your lender.
Lenders do not want their customers to default. Although it’s difficult, we recommend that you answer the phone and work out some sort of agreement with the lender before it’s too late.
If you default, your credit will suffer a severe blow and will be affected for seven years. The lender can also repossess your vehicle depending on your situation. You will have a hard time finding another credit as long as this account is on your credit report.
File the balance sheet
You may consider filing for bankruptcy if your financial situation is dire. However, this will not automatically get you out of car loan debt. And if you get out of it, you risk losing the car in the process. A judge can grant relief in some cases, but every situation is different. We recommend speaking with a personal finance advisor to make the best decision.