Key Takeaways

There are several ways to get out of a car loan you no longer want. Ultimately, the right option will depend on whether you’ve defaulted, the amount you owe, and how much the car is worth.

If you’re wondering how to get out of a car loan, you could sell the car, refinance the loan, or negotiate with your lender. 

A car loan is a great way to get a new vehicle without having to come up with the entire amount upfront. But if you are on the verge of having an upside-down loan and cannot afford the car, or if you’re not happy with your vehicle, there are ways out.

Understand the Consequences

It is possible to get out of the loan, but there may be some consequences. There may be multiple reasons why you may want to get out of the car loan. For example, you may no longer want the vehicle, or you may be experiencing buyer’s remorse. 

Depending on the option you choose, it may affect your credit score. For example, options like selling your car with a loan or negotiating with your lender will have a minimal impact on your credit report. Refinancing your auto loan can also impact your credit, especially if you are adding a new account which affects the average age of your accounts.   

Voluntarily surrendering your car has the most negative impact on your credit history, especially if you have already missed payments and the lender has threatened you with repossession.

Negative Impacts of Defaulting on a Car Loan

Defaulting on a car loan comes with major consequences. The auto loan delinquency rate in the U.S. for Q1 2023 was 3.89%. Once you take on a loan, you’ll be responsible for making payments regularly. If you miss payments and default on the loan, you may receive collection calls from the lender. Additionally, your vehicle may be repossessed, and there could even be a lawsuit.

It is best to consider a debt resolution program before you reach this stage. Regardless of your situation, several possible choices are available to avoid defaulting.

Legal Consequences of Illegally Getting Out of a Car Loan

If you are in a challenging situation at the moment, call your lender to discuss possible solutions. Exiting the loan illegally and abruptly can have a lasting impact. Auto loans are secured debt. If you default on the loan, the lender may repossess the car, which may ruin your credit score. If there are no other solutions, surrender the car voluntarily to avoid repossession.

How to Get Out of a Car Loan - 4 Possible Solutions

If you’re wondering how to get rid of a car loan legally, there are four possible solutions for you to choose from.

1. Consider Refinancing

Refinancing refers to taking out a new loan on more favorable terms and using the funds to pay off your existing loan. If you have good credit, you may be able to get a new car loan at a lower interest rate. This can help you save on interest charges and help you pay off the loan faster. Refinancing also allows you to extend the repayment term to make monthly payments lower.

Benefits of Refinancing

There are several different benefits of refinancing your auto loan, such as:

  • You’ll be paying less towards interest if you qualify for a low-interest rate.
  • You can lower the monthly payments by extending the loan term.
  • You can pay off your car loan earlier.
  • If you opt for a shorter term, you can direct more of your payments toward the principal and save more on interest charges.  

When Refinancing May Not Be a Good Idea

Although refinancing your car loan has several benefits, there may be better options for you, especially if it bumps up your total loan cost. Here are a few scenarios when refinancing your vehicle may be unwise:

  • If you have an older car. Lenders may not be willing to refinance older vehicles.
  • If you have an upside-down loan. When you refinance this type of loan, you’re likely to get a much higher interest rate.
  • If your current loan comes with prepayment penalties.
  • If you purchased the car recently.

2. Trade in the Car

Another option to get out of your car loan is by trading in your car at a dealership and purchasing a different car. This can be one of the easiest and simplest ways to get out of a car loan you no longer want.

How Trading in a Car Works

You can get in touch with a few dealerships to see if you will be able to trade in your car for one which is less expensive, perhaps a used car. You can check the value of your car online before you do this. If you have negative equity on the loan, you’ll owe more than the worth of the car. If you have positive equity, the remaining balance can be applied toward the new car.

When Trading in a Car May Not Be a Good Idea

Trading in a car may not always be a good idea, especially if:

  • The car is worth less than the outstanding loan balance.
  • You have purchased a new car recently.
  • You have prepayment penalties on the loan.

3. Negotiate With the Lender

You can always reach out to the lender and negotiate with them for more favorable terms. This is a good option when you have a good payment history and a good credit score. Negotiating is also recommended when you need temporary assistance because of unforeseen circumstances impacting your ability to pay. You should know, however, that the lender is not under an obligation to negotiate. They may choose to do it to avoid pursuing repossession or sending your account to collections.

How to Negotiate with the Lender

If you’re thinking about negotiating with your lender, it is best to reach out to them before you fall behind on your payments. They are more likely to be receptive if you have a history of paying on time each month. You should also have a plan in place to resolve your situation at the earliest and should let them know how much you can currently afford. Lenders are unlikely to offer debt forgiveness even if you have exceptional negotiation skills.  

Lenders may offer you several options to choose from, such as debt forbearance, stretching out the loan term for lower monthly payments, or payment deferrals for a short time. You should keep in mind that you’ll pay more interest over time with a longer term. Take a close look at your financial situation and determine what monthly payment you’ll be able to comfortably pay before you negotiate with your lender.  

When Negotiating with the Lender May Not Be a Good Idea

Although negotiating with your lender can be one of the best ways to get out of a car loan or modify your repayment terms, it may not be right for you. If you have already defaulted on the loan or do not have a good payment history, negotiating may not be a good idea. Some lenders may not be willing to work with borrowers, in which case you’ll have to look for an alternative option.

4. Consider Bankruptcy

If you are facing financial hardship and don’t think your situation is likely to improve in the future, consider bankruptcy as the last resort option. If you are struggling with a large amount of debt, both secured and unsecured, you may be able to afford your car payments and avoid bankruptcy if you get help with your unsecured debts. For example, you may enter a debt settlement program to pay off your unsecured debts at a lower monthly cost. This will free up your money so you can continue to make payments on your car loans. 

Bankruptcy won’t get you out of your debt automatically. You may also lose your car in the process. In some cases, the judge may grant relief, but every bankruptcy case is different. It is best to speak to a personal finance expert to make an informed decision.

How Bankruptcy Works

The two most common options for filing bankruptcy are Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, your assets may be sold to pay off your lenders. Non-exempt property, such as a second car or home, can be sold by the bankruptcy trustee. Any remaining debt will be wiped off once your debt is discharged.

Chapter 13 bankruptcy allows you to restructure your debt and then repay some of your lenders. You’ll be required to submit a repayment plan to the bankruptcy trustee. This option may allow you to retain valuable assets. It is also important to remember that not all debts may be discharged through bankruptcy. Secured lenders may still enforce liens against the property you own in some cases. Since the car loan is secured, your lender may still be able to enforce a lien to recover it.  

When Bankruptcy May Not Be a Good Idea

Bankruptcy is always considered as a last resort in case of dire financial situations. It may not be a good idea in many cases, such as:

  • If most of your current debts are secured, such as car loans and home loans, they may be sold to pay your lenders.
  • Bankruptcy is expensive, so it may not be a good idea if you don’t have enough money to cover the fees and costs.
  • If you work in certain occupations such as law enforcement, finance, or anywhere that requires you to be licensed, bonded, or need a high-security clearance, it may jeopardize your career.

Avoiding a Bad Car Loan in the Future

Now that you know how to get out of your car loan, it is important to educate yourself so you can avoid a bad car loan in the future. Always get preapproved before going to the dealership. Knowing what you can afford will also help you make an objective decision.

Research Car Loans

Before making a large purchase, such as a car, it is important to take the time to research car loans and compare your options. Use a car loan calculator to check the total loan costs and how your down payment and term length can impact your overall costs.

Understanding Loan Terms

Your loan terms can have an impact on how much you’ll end up paying over the life of the car loan. For example, a longer term can reduce your monthly car payment, but it can increase the total interest you’ll pay over the life of the term. Take the time to read through the loan agreement offered by the lender to check for the interest rate, prepayment penalties, installment amount, and associated fees.

Negotiating the Loan

You don’t have to take on the first loan you’re approved for. If you’re not happy with the terms offered by a lender, you can always negotiate to get a better deal. Compare loan offers online and take an offer from a competitor to a lender of your choice to ask for better terms. If you have a good credit score, lenders will be more likely to negotiate with you.

Final Thoughts on Getting Out of a Car Loan

It’s never too late to get out of a car loan if you can’t afford loan payments or if you no longer want the car. Take the time to understand the options available to you and choose what is currently best for your financial situation. Ultimately, it is important to remember that any of these options is better than defaulting on the loan.

If you have other forms of debt, like unsecured debts, be sure to consider other debt relief options such as debt consolidation, debt management, and debt settlement. If you have unsecured debt of more than $10,000 and are finding it difficult to pay it off, contact the debt professionals at TurboDebt today. Take benefit of our free consultation to see how we can help you find the right debt relief option for your individual needs.