How To Get Out Of A Car Loan

Yes, it may be possible to get out of an auto loan if you negotiate with your lender. But if you are past due on payments, your lender may not be willing to work with you.

There may also be penalties associated with trying to exit an auto loan early, such as early termination fees or higher interest rates that must be considered before making the decision to try and get out of a loan. Here are some way you can get out of a car loan.

Key Takeaways

• You have several options

  to exit a car loan, including renegotiating with your lender, selling the car, refinancing, trading it in for something cheaper or pursuing voluntary repossession. Each path comes with tradeoffs like fees, higher rates or added debt if you owe more than the car is worth.

• Getting out of a loan

  usually won't tank your credit if you keep making payments through the transition, though paying off the balance may cause a small temporary dip. Defaulting is a different story — it can damage your credit for years and trigger repossession or legal action.

• Before you act,

  call your lender first to ask about forbearance, lower rates or longer terms. Check your car's value on Kelley Blue Book to see if you have equity, and only consider voluntary repossession after weighing every other option.

Summary generated by AI, verified by MoneyLion editors

1. Renegotiate the Car Loan

Waiting until you can no longer afford your monthly payment is a bad idea. To discuss a new arrangement, call your lender. If you have a track record of making loan payments on time, they might be willing to assist. In addition to options like a lower interest rate or longer payment terms, the lender may offer a forbearance, which temporarily postpones your payments. 

2. Sell the Car

Consider selling the car outright and using the money to pay off the loan if you want to get rid of both the car and the loan. If your car has amassed equity, doing this might be a good idea as you might be able to sell it for more than you owe, leaving you with some extra money to put toward a new vehicle.

3. Refinance Your Car Loan

Refinancing the loan is one option for getting out of your current auto loan. A refinanced loan will replace your existing auto loan. You’ll still keep the car and continue making payments, but refinancing may reduce your monthly payment depending on the interest rate.

4. Trade in the Car

You may be able to trade in your car for a less expensive car. To determine the value of the vehicle, use online resources like Kelley Blue Book. When you have negative equity and owe more money than the car is worth, you are said to be upside down on your loan. The dealer will add the negative equity to the loan on your new car if you trade in the car but don’t have enough cash to pay off the loan.

Your loan amount will be higher than it would otherwise be for the second vehicle alone because the monthly payment will include both the loan for the second car and the negative equity from the first car.

5. Voluntary Repossession 

Voluntary car repossession may sound scary, but it can actually be a great way to get out of an unaffordable loan. You can give back the vehicle to the lender and start fresh with a clean slate. It won’t remove all of your financial obligations completely, but it should help reduce your overall debt load. 

You’ll get put on the fast track toward building better credit for when you want to purchase again down the line. Before taking voluntary action though, weigh your options and do research — while it might seem like a good idea now, there may be another viable solution that could help more in the future.

Will Getting Out of a Car Loan Affect My Credit Score?

Getting out of a car loan typically won’t hurt your credit score as long as you continue making your monthly payment. When you pay off the loan, you may see a slight drop in your credit score — this is normal. If you have other revolving accounts, the dip is usually only temporary. 

Why You Should Avoid Defaulting on Your Car Loan

Defaulting on an auto loan should be avoided if possible. Not only does this result in a blemish on your credit report that can take years to repair, but it may also lead to costly legal fees, legal action from the lender or repossession of your vehicle, which can also be harmful to your finances.

Defaulting on an auto loan can also lead to increased interest rates and other unfavorable terms on future loans, further affecting your financial situation. 

FAQ

What happens if I don’t want my financed car anymore?

If you don’t want your financed car anymore, you can either sell it, trade it in or voluntarily give it back to the lender. Keep in mind, you’ll still need to pay off the balance of the loan.

Does voluntary repossession hurt your credit?

It’s best to talk to your lender if you’re having trouble making car payments. They may be willing to work with you, and giving back the car voluntarily is better for your credit score than having the car repossessed.

Can a car loan be written off?

Yes, lenders may choose to write off auto loans when they believe they’re unlikely to collect the debt. But a write-off doesn’t mean the debt is forgiven.

Key Terms

• Negative equity: Negative equity means you owe more on your car loan than the car is worth.

• Refinancing: Refinancing replaces your current auto loan with a new one, usually to lower your rate, payment or both.

• Forbearance: Forbearance is a temporary pause or reduction in loan payments that a lender may allow during financial hardship.

• Voluntary repossession: Voluntary repossession means you return the car to the lender, but you may still owe the remaining balance after the car is sold.

• Charge-off: A charge-off means the lender marks your unpaid debt as a loss, but you still owe the money.

Sources:

• Consumer Financial Protection Bureau: Mortgages key terms

• Federal Trade Commission: Financing or Leasing a Car

• Consumer Financial Protection Bureau: Repossession in Auto Finance

• Equifax: What is a Charge-Off?

Summary generated by AI, verified by MoneyLion editors