How to Get Out of a Car Loan
Stuck in a bad car loan deal or can’t afford to make your monthly payments? Here’s how to get out of a car loan.
November 21, 2022
Next to a home, a car is often the second largest asset that most people finance. But what happens when you take out a car loan and later struggle to keep up with your payments? Or what if you realize that you got a very raw deal? How can you get out of your car loan? Keep reading to find out your options.
What are the components of a car loan?
A car loan is an installment loan, which means that it’s paid back in regular payments, or installments, over a fixed period. The car acts as collateral for the loan, so if you fail to keep up with your payments, the lender can repossess the car.
A car loan has three main components:
Principal: The total lump sum of money that you borrow from a lender.
Interest: The amount of money that the lender charges you for borrowing the money to buy the car.
Repayment term: The length of time a lender gives you to pay back the loan in full. It varies from lender to lender but is typically between two and seven years.
Strategies to get out of a car loan
There are several reasons why you might be itching to get out of a car loan you took out previously.
It could be that, back then, you came across a dashing new car that you just had to have even though it was out of your price range. At the time, you didn't give much thought to how much you'd be paying for it monthly. But now that the excitement has worn off, the payments that didn’t seem much at first are becoming a pain in the neck.
Or maybe the payments were actually affordable when you first took out the loan. But that is no longer the case because your financial circumstances have changed — e.g., your monthly income is now less than it was before.
No matter how you’ve gotten there, the good news is that there are ways to get out of a bad car loan or one that you can no longer afford to make.
Renegotiate the terms of the loan
If you’re experiencing financial hardship, some lenders may be willing to work out a modified payment schedule for you. They could, for example, agree to let you make lower monthly payments, make interest-only payments for some time, extend the terms of the loan, or even pause your payments for some time. Sometimes, a lender may even agree to modify the entire terms of the loan.
Of course, this all depends on the policies of the lender. But in general, if you have a good credit score and a solid history of timely payments, there are good chances that the lender will be willing to hear you out and renegotiate your car loan.
Pay off the loan
Another quick and easy way to get out of a bad deal is to pay the car loan off in a lump sum by doing so to eliminate a big financial burden once and for all. Needless to say, if you’re already struggling to make ends meet, that may be easier said than done. But if you have the funds to pay off the loan, it’s an option worth exploring.
That being said, there are disadvantages to paying off a loan early, such as prepayment penalties. So before you take this option, make sure to have another look at the terms of your loan. Also, confirm with your lender the total loan payoff amount.
Rather than paying off the loan in a lump sum, you could also pay more than the minimum due amount every month. This can expedite the time it takes to repay the loan and help you get out of it earlier.
Sell the car
If you’re not upside down, i.e., if you don’t owe more than the car is currently worth, another good way to get out of a bad loan deal is to sell the car. This is a far better choice than having the car repossessed and auctioned off for less than you could get on your own.
You can use the money from the sale of the car to pay off the debt. Once you’ve sold the car, you can use the proceeds to pay off the loan. You can use any extra funds from the sale as you see fit.
Refinance the loan
If you are wondering how to get out of a car loan, another solid option is refinancing. This means taking out a new loan with better terms and then using it to pay off your current car loan. If you have a good credit score and are well into your loan, you may be a prime candidate for refinancing. You could end up with a lower interest rate, which will reduce the cost of the loan and help you pay off the loan faster.
Refinancing a loan might come with some fees or charges, including an early payment fee by your current lender, so keep that in mind.
When it comes to how to get out of a car loan, as a last resort, you can also agree to a voluntary repossession by the lender. This will save the lender repossession costs and, as a result, they may be more willing to give you a more favorable final payoff amount.
The lender will report the voluntary repossession to credit bureaus, though this could actually be negotiable with some. Regardless, even if a voluntary repossession ends up in your credit report, future lenders are likely to look at it more favorably than a forced repossession.
Can you back out of financing a car?
You usually can't back out of a car loan after signing the contract. Unfortunately, the Federal Trade Commission (FTC)’s “Cooling Off Rule” that allows customers to cancel certain sales contacts within three days of signing doesn’t apply to cars. That’s why it’s important to do your due diligence and evaluate your budget before signing a car loan contract.
Can you get out of a car lease?
It’s possible to get out of a car lease, but it can be very expensive depending on how you do it.
Most leasing contracts, for example, will allow you to return your vehicle early. However, you’ll still be responsible for all remaining payments on the current lease. You’ll typically also have to pay an early termination fee, which can be high for a new lease.
That said, there are ways to get out of a car lease without losing money:
Lease buyout: This is where you end the car lease by buying the car’s residual value, all remaining payments, and fees, and then selling the car for a higher fee than the total buyout.
Lease transfer: This is where you find someone else who is ready to take over the lease payments on your car. For example, you can swap the lease with a friend or family member or even use intermediary sites like Lease Trader and Swap Lease to find an interested third party. But check with your leasing company first to find out if they allow lease transfers and the cost.
Will getting a car loan impact my credit?
The way getting out of your car loan affects your credit score depends on your current circumstances and how you actually get out of the loan.
Voluntary repossession, for example, will negatively impact your score as it means that you did not fulfill your debt obligations.
On the other hand, paying off your car loan can positively impact your score as it reduces your overall debt balance. However, that will only be the case if you already have additional credit accounts on your profile and a good credit mix overall, such as credit cards, mortgages, and other types of credit.
If you have a thin credit file, paying off your car loan may have a negative impact on your credit instead of a positive one. That’s because by paying off the car loan, you reduce the quantity and variety of credit accounts that you have, which are among the factors credit bureaus look at when calculating your credit score.
If your car payments have become unaffordable, make sure to seek a solution on how to get out of the car loan before you start missing payments. This will protect your credit score and ensure that you’re still in a good position to renegotiate your loan with your lender or refinance your loan.
In the meantime, if you’re looking for a way to free up cash from your budget to put towards your car loan payments, check out Tally+. Tally can provide you with a lower-interest personal credit line to consolidate your high-interest credit card debt, saving you money and allowing you to pay off what you owe more quickly.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.