Sometimes, a car loan may not work as you had hoped. Maybe the interest rate is too high for your budget, or you’ve lost a source of income. Perhaps your family has expanded (congratulations!) and now you need a ride with more space.
Whatever the reason, if you need to get rid of your car and the loan it came with, don’t panic. With a little knowledge and effort, you can get out of your car loan without too much trouble. While it’s not a simple process, doing so will allow you to get a much better deal on another vehicle from a different dealership.
In this guide, we’ll break down some of these common options for getting out of a car loan by exploring refinancing, voluntary repossession, and more! Read on to learn all about the different ways you can escape a car loan that’s no longer working for you.
Why You Shouldn’t Return Your Car to Get Rid of the Loan
So, you want to return the car to the dealer and be debt-free. That’s usually not an option, but it’s worth asking your lender if your loan agreement has a return policy.
If not, try negotiating.
If the lender agrees, they will sell your car. The lender will then apply the proceeds of that sale to pay off what you owe on your loan, as well as reimburse any associated costs. However, the car isn’t always worth enough to pay off your loan; you might still owe something on it even after the sale.
If this happens, the car loan lender can demand that you pay them back in full. If you don’t (and many people won’t be able to do so), they may sue and garnish your wages until their costs are recovered.
What About Trading in the Vehicle?
Consider the lender’s policies about trading in your car when it’s time for an upgrade. Most lenders won’t permit it, but some may, especially if they can make more money off the new car than they could off the old one.
The problem with this option is that it’s not likely to lower your debt. Plus, you’ll have new car loan payments, which will probably be higher than the one you currently have.
Think About Refinancing Your Loan
If you have good credit and are looking for a way to lower your current car loan rates, refinancing is one of the best ways to do it. It will help you lower your monthly payment. But refinancing can also increase the time you take to pay off your loan, and may even raise the total amount you’ll eventually spend.
If you refinance too soon after getting the original loan, however, some lenders may charge a penalty. Weigh all of your options and figure out what makes the most sense for your individual circumstances.
The Cons of Refinancing
For those who have already established credit histories, refinancing will cause your credit score to drop. Remember, you’re taking out another loan and adding to your debt load.
The score drop is usually temporary. You can use this refinance as an opportunity to establish a reliable track record of on-time monthly payments, which will help boost your credit score.
Questions to Ask Before Refinancing
There are some things you’ll want to consider before you meet with your bank, or fill out an application for a new loan. Before you take the plunge, here are a few key questions to ask:
What Are the Terms of the New Loan?
You’ll want to know how long you have to pay it off and what the interest rate will be, as well as the monthly payment amount. You should also find out if there are any additional fees, such as an application fee.
How Much Money Can You Save?
This is probably one of the main reasons you’re considering refinancing in the first place. Once you know what your interest rate and monthly payments will be, you can do some quick math to figure out your savings. Look at how much more money you’ll save over time with a lower rate than with a higher one.
If it’s not a significant amount, refinancing probably isn’t the right move for you.
Are You Better off With a Shorter or Longer Loan Term?
Part of getting a lower payment is extending your loan term. But that may not be the best idea, especially if you’re already halfway through paying off your car.
Can Your Credit Score Take the Hit?
Keep in mind that refinancing your car loan will affect your credit score. When you apply for credit, the lender sends a request to a credit bureau. This is called an inquiry, and it lowers your score slightly each time.
Make sure you can afford the new loan payments, as credit damage from a failed repayment plan can affect your score even more.
Pay off the Loan
If you can’t afford your car payments, there is another option for getting out of your auto loan: Pay it off. If you have a large balance left on the loan, however, this may not be possible.
When you can make extra payments toward the loan, do so. This will be better for your credit score than refinancing.
You should know that there’s likely going to be a prepayment penalty. The lender doesn’t make as much money if you pay off the loan early, so they charge a fee for doing so. Be sure to factor this fee into your calculations before you decide to take action.
Sell the vehicle
If you decide to sell your vehicle, it pays to be informed about its value. You can do this by checking with a local used car dealership or through online sources.
The condition of your car will also influence its price. If you have an older model that needs repairs or maintenance work done, this will change how much money you can get for it.
You should also consider how much it costs to sell the vehicle before making any promises. This includes registration fees, advertising costs (if necessary), title transfer fees, etc.
If you decide to go ahead with selling your car, be sure that your lender allows this option. Not all lenders allow borrowers to sell their cars themselves. If yours doesn’t, contact them directly to hear your options.
Transferring Your Car Loan
Selling your car doesn’t release you from the responsibility of your vehicle loan. You must transfer both ownership and liability to the buyer before fully separating yourself from that asset.
If there is a cosigner on the loan, they will also need to be notified and give up ownership.
The new loan holder must submit an application for the loan. If the borrower is applying to your institution, they must fill out a new contract with the same terms and conditions as your old one. Sometimes, your lender may go even further and require the transferee to cosign for you instead of taking over.
After being approved for the loan, both you and the transfer partner must sign the changed title at your local DMV office. You must bring valid identification and a bill of sale that outlines the terms of your transfer, payment information between you two, etc. The DMV will then have you fill out a form that enables the actual legal transfer.
Voluntary Repossession
Voluntary repossession, also known as voluntary surrender, is when you hand over your car to the lender. It can be a good option if you have access to another vehicle or know that it’s only a matter of time before you can get another car.
The advantage of this is that the lender won’t have to go through the hassle of repossession, which means you may sway them to offer better terms on your next auto loan.
Another plus: voluntary repossession may free you of some costs, including late fees or expenses tied to selling the vehicle.
The Cons of Voluntary Repossession
If you want to get out of a car loan and are considering voluntary repossession, be aware that this will damage your credit score. You should know that lenders check the public records for any foreclosures as part of their standard procedure when approving new loans.
So, how bad will it affect your credit score? Expect to see a drop of anywhere between 50 to 150 points on average. This can take years to recover from completely—even if you don’t make any further late payments during those years.
Never Default on Your Car Loans
Keep up with your payments until you’ve gotten rid of the car loan. Otherwise, your credit score will drop.
Moreover, if your lender can’t get their money back, they may have no choice but to prosecute you for full payment of the loan plus interest and fees.
What to Do After Getting Out of a Car Loan?
You’ve decided to get out of your car loan—what’s next? Here, we’ll discuss three ways you can get your finances back on track and qualify for a new car loan.
Raise Your Credit Score
First, you’ll need to rebuild your credit. A higher credit score will help you qualify for a better interest rate on your next car loan, and could save you thousands of dollars over the life of the loan.
You can start by paying down any outstanding debt and making all of your payments on time. If you have a history of late payments, it may take some time to improve your credit score enough to get approved for a new loan. Be patient and stay consistent in your new financial habits.
Save Up for a Down Payment
A large down payment will help you get approved for a loan and could also lower your interest rate. The size of your down payment depends on the lender, but 20% is a wonderful goal to aim for. If you can’t afford that much, don’t worry—even 10-15% could make a big difference in the terms of your loan.
Create a Budget
When setting up a budget, be honest with yourself about what expenses there are in your life (and if those expenses are necessary). Once you have created this budget, come up with an equation where less than 10% goes towards paying off your car loan.
If you can’t find a lender with a payment amount of less than 10% of your monthly income, consider saving up so you have the money to make payments.
Shop Around for Your Next Loan
You’ll want to find a lender that will work with you—and this can mean different things. For example, if you have bad credit or no credit at all, it might be difficult for some lenders to extend a loan. In this case, you can look for a lender that specializes in people with your unique financial situation.
If you already have good credit and a history of paying your bills on time, it’s fairly easy to find lenders. However, not all loans are fair. Shop around and ensure that you’re getting the best interest rates, repayment terms, and fees for your financial situation.
You’ll also want to look at the loan’s fine print and make sure that you understand all the terms and conditions before signing on the dotted line.
Finance Your Next Vehicle in Minutes
Getting out of a car loan is almost certainly going to damage your credit score. However, it’s possible to finance another car. And getting a new loan doesn’t have to be difficult.
At CarsFast, our mission is to help people with all types of credit get the loans they need. Apply today and say goodbye to bad car loans.