How To Get out of a Car Loan

You finally found it! You finally found the right car at the right price. It’s the right model, the right color, the right size. New, used, doesn’t matter. It has the accessories you want, and the safety features you need.

You haggled with the salesperson and at the end of the day, you were OK with the terms of the loan you had to take out to get it. As you drove your new wheels off the lot, you were one elated customer. What a feeling!

That was a good day.

But things change, don’t they?

The reality of the payments on that car loan settles in. Any number of unexpected financial obligations – unexpected medical bills, house repairs, a new child, divorce — might’ve come between you and your ability to keep up with them.

Or maybe in the euphoria of finally finding the right buggy, you just over-estimated how much car you could afford.

However it happened, you’ve realized you can’t pay off the loan. You might still love the car, but the payments on it have become a burden rather than a blessing. If it helps, you’re not alone. According to Edmunds, an online resource for auto inventory and information, the average monthly payment on new car loans in the fourth quarter of 2023 was $739, higher than it’s ever been.

And guess what? Fourth quarter numbers from the Federal Reserve Bank of New York showed auto loan delinquencies on the rise. Go figure.

Bottom line: You want, or need, to get out from under your loan before you default on it. It can be done, but it’s tricky. Before you try, you need to understand the process, evaluate your options, and recognize the ramifications of your decision.

Let’s explore how to get out of a car loan.

Assess Your Financial Situation

In a bit, we’ll get into the specific ways to relieve some of the burden of your car loan. But because the state of your finances will steer you toward your best approach, it’s important to know exactly where you stand before you choose one of the alternatives.

That means taking stock of your income, your expenses, and your other debt obligations. In other words, that means it’s time for a hard look at your budgeting system (you are working with a budget, right?) and your financial goals.

How deep in debt are you? How far away are you from being able to meet the monthly car payment? What can you afford in the way of regular payments? Where does the car loan rank when you prioritize your financial obligations? How important is the car to your everyday life? What is the impact of the loan payments on the other financial goals you’re trying to reach such as funding a vacation, saving for retirement, building an emergency fund, or paying the kids’ college tuition? How healthy is your credit score and how far are you willing to let it drop?

Get a good grip on answers to those questions. They’ll help you determine the most viable option for getting out of your car loan.

Review Your Loan Agreement

It’s a pretty good bet you aren’t particularly well-versed in the weeds of the loan to which you agreed at the end of a long negotiation that day at the dealership. You probably know the size of your down payment, but maybe not so much beyond that. Don’t let it bother you. Sure, it would’ve been nice if you took care to understand the guts of your loan agreement before you signed it, but very few car buyers pay attention to the fine print of a loan document at that point in the exhausting process.

Now, though, is the time to get acquainted with the critical components of your car loan, including:

• The interest rate, meaning how much you’re paying to borrow the money to buy the car.
• The loan term, meaning how long you’ll be making regular monthly payments before the loan is paid off.
• The prepayment penalty, meaning the fee you’ll be charged if you pay off the loan before the date you agreed to with the lender.

Pull out the agreement and read the details. They’ll include information about your obligations to the lender, as well as your rights as the borrower. Pay particular attention to the clauses (usually written in the dense legalese common to contracts) that relate to if or how you can separate yourself from the loan. If there is a section about early termination fees, for example, you’ll see how costly it will be if you end the agreement before the loan term is up.

And look for paragraphs about a balloon payment. Your loan might not include one, but if it does, it means you agreed to reduce the amount of your monthly payments through most of the loan term in exchange for one considerably larger payment at the end of it. If you won’t be able to handle that last big balloon payment, your options for wriggling out from under the loan might be more expensive.

When you know exactly what’s in your loan agreement and exactly what your financial situation is, you can make a smart decision about how to get out of your car loan.

Options for Getting Out of a Car Loan

Wouldn’t it be nice to just drive the car back to the lot from which you so happily drove it home on that thrilling day you bought it? Slip the keys and the paperwork through the night slot, rub your hands together, and walk away free and clear of the loan obligation? The dealership gets the car back and you get rid of the monthly payments, even-steven? Voila!

Well, yeah. It’d be nice. But it doesn’t work like that.

The ways it does work are a little more complicated. We’ll get into each of the possibilities in a little more detail next, but for now here are the main options for how to get out of a car loan:

• Sell the car privately. Find someone else who will buy the car from you and use the proceeds from the sale to pay off your loan.
• Trade in your car. A dealer might offer enough in the way of trade-in value to pay off your existing loan and sell you a lower-priced replacement car with a more affordable loan.
• Refinance your car loan. Maybe you can get a lower interest rate and/or a longer loan term to replace the original loan.
• Voluntary repossession. You might be able to turn the car back in to the lender in the hope he or she will ease up on the demands of your loan obligation.
• Loan assumption or transfer. It’s possible for someone else to take over your loan, but the lender holds all the approval cards in this transaction.

As we’ll see, each of those options has pros and cons. While you contemplate what to do, you should apply those pros and cons to your unique financial circumstances.

Sell the Car Privately

In a perfect world, a friend or family member will step up and take the car off your hands for a sum princely enough to satisfy your lender and allow you to buy a cheaper replacement. But in an imperfect world, that knight in shining armor won’t be there for you. In that world, you must advertise the car’s availability, negotiate with potential buyers, and handle a pile of paperwork before you see any money. Still, selling the car is a way to come up with the loot to pay off the loan. Word to the wise, though: Know how much you owe on the loan before you settle on a sales price.

The pros: You’ll likely get a higher price selling it privately than you would if you trade it in, and you’re in control of the transaction. The impact on your credit will be less than the hit you’ll take with some of the other options.

The cons: You must get permission to sell the car because you technically don’t own it; the lender does. Plus, you’ll likely experience a temporary drop in your credit score. And did we mention the advertising, negotiating, and paper-working costs/nuisances?

Trade in Your Car

This can work, depending on how much you still owe on the loan and what you can get for the car you’re trading in. If what you owe on the loan is less than what you’ll get in trade-in value, you can use the money to get free of the original payments and take out a new loan (presumably more affordable) for a replacement car. But if the payoff amount of the existing loan is greater than the trade-in value, the dealer could require you to roll the balance of the original loan into the loan for your next car. That likely makes the new loan even more expensive than the one you’re trying to eliminate. Either way, you’ll want to shop around for trade-in quotes and negotiate with several dealerships.

The pros: When the math works, it’s a convenient way to get out from under your existing loan and drive away with a replacement, though probably cheaper, car with a more affordable loan. This option, too, will have only a minor effect on your credit.

The cons: You might get less for your original car as a trade-in than you would by selling it privately. Plus, you could be assessed a financial penalty for paying off the loan early.

Refinance Your Car Loan

When you refinance, a lender gives you a new loan with enough funds to pay off the old one, so it’s good to keep an eye on the loan market. If you see that interest rates are lower than they were when you took out your original loan, refinancing might get you better terms with lower monthly payments. Or if your credit score has improved since you negotiated the first loan, you might be viewed as less of a risk and be rewarded with better loan terms. As with most of these options for getting out of a car loan, you’ll maximize the benefit by shopping around. Compare loan offers to find the best available interest rate.

The pros: Your refinanced loan should be more affordable, meaning your monthly payments are lower and you might have more time to pay it off. The transaction process might even provide a brief hiatus from making any payments at all for perhaps up to three months. Plus, you get to keep your car!

The cons: Your car might not qualify if it’s too old, the mileage is too high, or the outstanding balance on your original loan is too big. You might not qualify if you’re behind on payments or have a spotty credit history. If you do refinance, early repayment fees for the original loan are a possibility. And if your refinanced lower monthly payments are associated with a longer repayment term, you might end up paying more in interest. The risk to your credit rating is greater with this option.

Voluntary Repossession

When your car gets repossessed because you haven’t been making payments, your lender just takes it, by force, if necessary, because the car is the collateral that secured your loan. It isn’t good for your credit score, your peace of mind, or your chances for loan relief. A voluntary repossession, on the other hand, is a proactive move in which you tell the lender you can’t meet the terms of the loan and are willing to return the car. The lender, then, tries to re-sell it to someone else to make up some or all of what you owe. You make a voluntary repossession happen by reaching out to the lender yourself, making the case that you can’t keep up with the loan payments, convincing him or her you’re worthy of a little mercy, and then making the arrangements to return the car.

The pros:  Because you saved the lender the cost and aggravation of repossessing your car without your cooperation, he or she might give you a small break on your loan obligation. You might also get some relief from the fees associated with the original loan and/or the resale of your car. And you don’t have to suffer the ignominy of seeing your wheels towed away against your will.

The cons: You lose your car, but that’s just the start. If it re-sells for less than the balance on your loan, you’ll still owe the difference. Voluntary repossession takes a big bite out of your credit score and stays on your credit report for seven years, which will make future loans harder to get. Those credit hits are only marginally better than you’d experience in an involuntary repossession. Bottom line: Voluntary repossession should be a last resort.

Loan Assumption or Transfer

This is a less likely solution to your problem. Most loan contracts don’t permit a straight transfer from one borrower to another under the terms of your original loan because of the potential for insurance and liability confusion when someone else takes on the financial responsibility for the car you’re driving. (Reviewing your agreement document should tell you whether your lender allows it.) On rare occasions, someone else can take over your loan obligation if you’ve borrowed the money from a private lender who trusts both you and the person assuming the loan. Once you find a person willing to take on your loan, you’ll need to contact your lender to see if he or she will agree to the deal. Then you’ll need to fill out the paperwork, transfer the title to the car’s new owner, and update the registration and insurance.

The pros: You get relief from your loan payments.

The cons: Most lenders won’t accept a straight loan transfer. If they do, you must find someone whose creditworthiness is strong enough to be approved. Should the person assuming your loan default on the payments, you could be held responsible for them. There might be fees involved with the transfer. And you can expect at least a temporary drop in your credit score.

Alternative Solutions

Whatever you decide to do about your auto loan, it’s important to consider all the possible avenues for relief from those payments. It might be that none of the options we’ve discussed so far seem feasible. Maybe you can’t or don’t want to pursue them, for whatever reason.

If that’s the case, you still have alternatives before you reach the default stage. And trust us, you don’t want to default on the loan. Your credit will plummet and stay plummeted for years, your car very likely will be repossessed, and you’ll probably still owe your lender money. There is no upside to default.

So, what else can you do?

You might have access to financial assistance programs offered by lenders that are available for people struggling to make loan payments.

You must ask for the help. We’ll explore financial assistance programs in a bit more detail next.

Financial Assistance Programs

If you need financial help, your first call should be to your lender, who – believe it or not – really wants you to avoid defaulting on the loan. Ask about any hardship support he or she can offer in the way of a loan deferment or forbearance, which would allow you to skip some payments until you’re better equipped financially to meet the loan’s obligations.

Government programs can help, too, with auto loan assistance for low-income families and people with poor credit, at least on the front end of the loan process. (Unfortunately, there is no governmental debt relief designed specifically for auto loans in arrears.) And in most communities, there are charities that provide support for people struggling to make their auto loan payments. Dial 2-1-1 for information about charitable programs near you.

Not everyone will qualify for a hardship program. To be eligible, you’ll likely have to prove you’re experiencing serious financial difficulties because of a job loss, a medical emergency, or some other unforeseen circumstance. The approval process might take as long as a month.

Negotiating with Your Lender

Remember, your lender doesn’t want you to default on your loan. And why would he? If you default, he doesn’t get your money and he has to deal with the cost and aggravation of repossessing your car. So, when you tell him you’re having trouble making the payments, he (or she) likely will listen and be open to ways to relieve some of your burden. You can help convince him to do it.

For openers, don’t wait. As soon as you begin to experience doubts about your ability to pay the bill, let the lender know. Be candid about your financial trouble and respectful of the lender’s side of the transaction and have a handle on exactly what’s in your loan agreement. It will show him or her you want to be responsible for your obligations. Ask about specific options that might be available to help you avoid repossession and default and listen carefully to the response. Be an active participant in the discussions about the merits and challenges of each one.

If you are trying to get a reduction in the amount of your monthly payment, know how much you will be able to put towards it and use that as your goal for the negotiation. If you’re comfortable with your negotiating acumen, make your first offer a number below what you think you can pay each month. If it isn’t accepted, you’ll still have room to move in the lender’s direction. That helps give the resolution a win-win feel.

If your desired outcome is something else such as a payment extension, an interest rate reduction, or a temporary forbearance that allows you to skip some imminent payments, be prepared to tell your lender exactly how and why that remedy will help you eventually pay off the loan altogether. It’ll be easier for him or her to accept your proposal that way. If there is a hardship program for which you might qualify, put forth an honest case for your eligibility and provide the necessary documentation.

Try not to be defensive or argumentative as you discuss your options with your lender. Whatever your goal is, a calm, straightforward approach to asking for relief will help you achieve it.

Legal Considerations

Here’s why it’s important to find the right solution to your problem with your car loan: The moment you scribbled your John Hancock on the dotted line on the last page of your loan agreement document (not to mention when you initialed all those other pages and clauses at the end of what was likely a grueling session at the dealership), you signed a binding legal contract. You officially got a car, and your lender officially got your promise to pay back the loan he or she gave you to get it. With interest.

No surprise, then, that there are ramifications for breaking that contract if you don’t make the payments. Those ramifications can be both legal and financial.

For openers, the car will be repossessed, by force if necessary, and your lender might turn your loan over to a collections agency to try to recover what you owe. Eventually, the lender will recoup some of his or her loss by re-selling the car, but that probably won’t let you off the hook. Repossession laws vary from state to state, but most states allow the lender to sue you for the difference if the new purchase price is less than the total amount of what you still owe on your loan. Assuming you don’t have the money to pay that difference, your wages could be garnished along with whatever other income and savings you have. Ouch.

You’ll likely also owe late fees for the payments you missed, and your credit score will nosedive dramatically. Just how far it will fall depends on several factors, including your previous credit history and how high your score was before you defaulted, but even being in arrears on your auto loan for 30-90 days could cost you as much as 100 points. Plus, your credit record will be marred by a big ugly default scar for the next seven years, which will make getting approved for credit cards and other loans much more difficult.

The lessons: Take the time and make the effort to understand your state laws and regulations regarding car loans and repossessions and reach out to a legal professional if you aren’t sure about your rights and obligations.

Making the Best Decision for Your Car Loan

Recap time. You want to make the best of a bad situation with your car loan, so you need as much information as you can gather. That process starts with assessing your financial circumstances to understand how dire the predicament really is. It continues with reviewing your loan agreement to see exactly what your rights and obligations are. And then it moves into an exploration of the options available to you for getting out of your loan, along with an evaluation of how each one fits your finances.

That’s a lot, but all of it is important, especially when you reach out to your lender to discuss your alternatives and negotiate a solution.

And you don’t have to do it alone. A financial advisor such as a nonprofit credit counselor can help you with each of those phases and talk you through some debt-relief plans to address your bigger-picture financial problems.

Among the services a nonprofit credit counseling agency offers are:

• Debt management, which can lower interest rates and monthly payments on your credit cards so your debt can be paid off in 3-5 years.
• Debt consolidation, which combines several of your debt balances into one monthly payment at a more affordable level.
• Debt settlement, which can make it possible for you to pay less than what you owe on a credit card debt.