How to Get Out of a Car Loan
While returning home from a road trip in 2017, my car hit a patch of gravel so perfectly that it sent me careening off the highway and into a signpost. Though I emerged relatively intact, my car was declared a total loss.
I was fortunate in more ways than one. Just a few months earlier, I’d lost my full-time job and decided to start my own business. This was a dream come true, but it also meant I hadn’t yet established a reliable cash flow. I found it difficult to make my monthly car payments, so a surprisingly positive byproduct of totaling my car meant I could get out of my car loan.
But that’s not an ideal or effective strategy to get out of an auto loan. Before my accident, I could have gotten out of my car loan with some knowledge, planning, and preparation — and without crawling out of the passenger side window into the mud.
Instead of relying on chance to help you get out of your auto loan, consider one of the following (and much safer) options.
How to Get Out of a Car Loan
But auto loans can seem burdensome. In fact, according to Experian, the average amount financed for a new auto loan in 2022 is $39,540, with an average monthly payment of $648. The average amount financed for a used car loan is $27,945, with an average monthly payment of $503.
New vehicle features, increasing demand, and rising inflation are driving the sticker price of cars ever higher. This increases the average auto loan size, potentially making it more challenging for borrowers to pay off their car loans and avoid loan defaults.
Luckily, it’s possible to get out of a car loan through a variety of options.
1. Pay Off the Loan
- A Good Option If: You have the funds to make a single lump-sum payment on your loan.
Like most other types of loans, car loans have two components:
- Principal: The amount of money you borrowed to buy the vehicle, including any taxes or fees
- Interest: The cost of financing a vehicle purchase
Most car loans accrue interest daily using simple interest rather than compound interest. This means interest builds on the principal amount you borrowed, but not on itself.
A portion of each monthly payment goes toward the principal balance. The remainder goes toward interest.
The interest portion is front-loaded, so a larger proportion of earlier monthly payments goes toward interest. Over time, the proportion shifts in a process called amortization. As your auto loan amortizes, a larger proportion of your payment goes toward the principal and less goes toward interest.
Car loans with long loan terms have lower monthly payments than loans with shorter terms. However, you’ll also pay more total interest over the life of your car loan.
Even if your car loan has a short term, paying it off early can save you heaps of money that would otherwise go toward interest. But how do you pull off this feat, especially if you still owe the bulk of your principal balance?
- Save Up. Every month, set aside a portion of your disposable income into a savings account. When your total savings exceeds what you owe on your auto loan, pay it off in a single payment.
- Earn More Income. Your financial situation might improve after taking out the loan. Maybe you’re promoted at work, get a raise, or move onto a higher-paying job. Consider using the extra cash to pay off your auto loan.
- Use a Windfall. A windfall of cash, such as lottery winnings, an inheritance, or a sizable tax refund, can help you pay off your car loan in full.
Before making what should be your final loan payment, find your paperwork and look for a Truth in Lending Act (TILA) disclosure. This document, which outlines the terms of your loan, should also reveal any prepayment penalties — additional fees that penalize borrowers for paying off their loans too soon.
If paying off your car loan early means paying a hefty prepayment penalty, consider paying down other debt or investing your cash elsewhere.
2. Negotiate With Your Lender
- A Good Option If: You’re having trouble making your monthly loan payment or you can afford to pay off the total of your vehicle’s retail value.
Banks, credit unions, and other lenders earn money by offering loans to borrowers. Because they profit most from borrowers paying off their loans in full, it’s in their best interest to work with those who might need a little help.
If you’ve made consistent and timely payments, consider contacting your lender to discuss options for negotiating your car loan. In some cases, your lender may allow you to defer payments or extend the loan term if you’re having difficulty making your monthly payment.
You can also negotiate to get out of the car loan by offering to pay your car’s retail value instead of its remaining loan balance. Though your lender is unlikely to agree to this sort of arrangement, it could consider it if your only alternative is to declare bankruptcy or default on the loan.
Keep in mind that for a negotiation to benefit you, your loan balance should still exceed the retail value — that is, what you would get if you were to sell the vehicle.
Additionally, the retail value of the car should still be more than its wholesale value — what the lender would get for reselling the vehicle.
3. Refinance Your Loan
- A Good Option If: You’ve improved your credit score and financial situation since you first took out your car loan.
Refinancing your car loan is when you replace your current loan with a new one. During this process, your new lender pays off the old loan at the same time they extend new financing to you.
Big deal, right? You’ve still got a car loan and monthly payment to worry about.
Except the new loan is based on your current credit score and credit history. If you’ve improved your credit since you first took out your loan, refinancing can help you get a loan with better loan terms, such as a lower interest rate or monthly payment.
It’s also an effective strategy for getting out of a predatory loan — a type of loan offered by unscrupulous lenders to borrowers with poor or no credit, bad financial situations, or limited personal finance knowledge.
After refinancing to a new car loan, try investing the savings back into it by paying down the loan early. Not only will you save money from refinancing to a loan with a lower interest rate, but you’ll also pay off the loan balance before it incurs its total interest.
4. Transfer the Auto Loan or Get a Cosigner
To Another Individual
You can get out of a car loan by transferring it to someone else. This person then assumes responsibility for the loan terms and monthly car payments.
However, it’s not as simple as it sounds.
Lenders rarely allow you to transfer your car loan to another borrower. Your loan contract could clearly state that the loan isn’t transferable. If it does allow transfers, it should spell out the criteria for transferring your car loan are listed in your loan contract. Either way, read it carefully to determine what’s possible.
If your lender does allow you to transfer your car loan to someone else, that person must apply for the loan and meet the same underwriting criteria you did when you first took it out.
After the lender approves the transfer, you’ll need to act as if you sold the vehicle — which you effectively did. This means signing a bill of sale and visiting the DMV to transfer the vehicle’s title.
In other cases, a lender won’t allow an actual transfer of the loan itself. Instead, they’ll allow you to take on a cosigner. Your cosigner becomes equally responsible for paying down the loan balance.
Onto a Credit Card
An alternative to transferring your car loan to another person is to transfer it to a credit card. But this can be tricky.
First, you need to make sure your card has a 0% APR on balance transfer. You also need to check if your credit limit equals or exceeds your remaining car loan balance.
And there’s another hitch. This method is only effective if one of the following situations applies to you:
- You can pay off the entire balance before your 0% introductory rate expires
- Your credit card’s regular APR is lower than that of your auto loan, which is very unlikely
If you decide this is the right choice for your financial situation, contact your lender to see how you can proceed. Some lenders don’t allow borrowers to use a credit card for a loan payoff, so you may have to contact your card issuer to request a balance transfer check or a direct balance transfer.
Before finalizing a balance transfer from your auto loan to a credit card, take note of any possible balance transfer fees. Balance transfer fees are sometimes substantial — as much as 5% of the transferred amount — and may therefore outweigh any savings you’d enjoy from transferring to a card with 0% APR.
5. Sell the Car
- A Good Option If: The value of your car is equal to or greater than your loan’s remaining balance.
You don’t need to pay off your auto loan fully to sell your car. Selling your vehicle is often an effective way to get out of a car loan.
The idea behind this method is to use the proceeds of the sale to pay off your loan — ideally without dipping into any other funds.
Start by contacting your lender to determine your car loan’s payoff amount. The payoff amount is the total of your remaining loan principal, daily accrued interest through the payoff date, and any prepayment penalties or fees. In other words, it’s usually higher than your remaining loan balance.
Then determine your vehicle’s worth. On average, a new vehicle loses about half its value in the five years after you buy it, but this varies considerably by make, model, market conditions, and other factors.
From there, decide how you want to sell your car. Selling to a dealership is the simplest solution, but you won’t get as much bang for your buck — dealerships need to consider the overhead involved in eventually reselling your car, so that’ll eat into what they’re willing to offer you.
On the flip side, selling to a private party can maximize your earnings. However, doing so is more complex than working with a dealership. You’ll need to coordinate with your lender and potential buyer to transfer the title, pay off the loan, and hand over the car.
6. Trade in the Car
- A Good Option If: You need or want a new or used car and want to get out of your current car loan.
Your life has likely changed in the time since you first took out your car loan. Maybe your family is bigger, you’re driving more and need a more reliable vehicle, or you’d prefer driving something with better gas mileage.
Whatever your reason for buying a new or used car, you need to do something with the old one, especially if it still has a remaining loan balance.
You can get out of your auto loan by trading in your car. When you trade in a vehicle, the dealership purchases it from you by paying off your loan balance. It then applies any extra funds to the purchase price of the vehicle you’re considering buying, similar to a down payment.
As a result, you’re able to get out of your car loan and behind the wheel of a newer car — with a lower monthly payment than if you hadn’t traded in your vehicle.
7. Opt for Voluntary Repossession
- A Good Option If: You’re having difficulty making your monthly loan payments and want to avoid the credit hit from a repossession.
Until your auto loan is paid in full, your lender still owns your vehicle, which was used as collateral to secure the loan. Defaulting on your loan means your lender can exercise its right to repossess — or take back — your vehicle. This allows the bank to resell your vehicle and recoup some of its losses.
Repossession typically happens if you’re more than 90 days late on monthly payments. Because the bank isn’t guaranteed to recoup all of its losses, repossession is a last resort. They want to allow you ample time to fulfill your debt obligation and pay your loan in full.
Voluntary repossession, or voluntary surrender, is an option for you to get out of a car loan without the severe ramifications of a repossession.
To start a voluntary repossession, you need to contact your lender to inform them that you’re unable to continue making payments on your loan and wish to voluntarily surrender your car.
This gets the wheels turning to schedule the return of your car to the bank.
Though voluntary repossession impacts your credit less than a repossession would, you’ll still take a significant hit. Expect your credit score to fall by anywhere from 50 to 150 points — more than enough to affect your ability to qualify for new lines of credit, at least temporarily.
You’re also still responsible for paying any fees or penalties related to the surrender. Additionally, if you’re underwater on the loan, you may have to pay a portion of your remaining balance even after the bank resells your vehicle.
The upside is that you’d no longer be on the hook for the loan, and whatever amount you do have to pay would be less than your total loan balance.
Getting Out of an Upside-Down Car Loan
An upside-down car loan, or underwater car loan, is a loan in which you have negative equity — you owe more on the loan than your car is worth.
This happens when you:
- Buy a car with little or no down payment
- Overpay for a car
- Roll an existing loan balance into a new auto loan
- Fall victim to predatory lending
Having an upside-down car loan isn’t ideal. I’ve been there before and it’s easy to feel demoralized when you know you’re essentially throwing money away.
But an upside-down car loan isn’t the end of the world. Continue making your monthly loan payments and invest time and energy in improving your financial situation.
Consider using extra income to pay down the loan quicker. If you’ve improved your credit since you first took out the loan, shop around for lenders willing to refinance car loans with negative equity. You’ll still owe the same amount, but a lower interest rate saves you heaps of money over time.
Your auto loan isn’t written into stone and it’s not something you’ll take with you for the rest of your life. With some planning and hard work, you can get out of a car loan — and potentially save some money along the way.
Of course, the best method for getting out of your car loan depends on your financial situation and preferences. There’s no correct choice in all situations. Evaluate your finances, look over your loan agreement, and decide on the best course of action that helps you accomplish your financial goals.