How to Get Out of a Car Loan: Your Options

Life circumstances or financial goals can change, leading individuals to seek ways to end their car loan obligations early. Understanding one’s current financial position and loan agreement is key to exploring options for managing or ending a car loan.

Understanding Your Car Loan

Before taking action on a car loan, gather specific details about the agreement. The current loan balance can be found on monthly statements, through the lender’s online portal, or by contacting the lender. Obtaining a payoff quote provides the exact amount required to close the loan on a specific date, accounting for accrued interest.

Understand the interest rate and Annual Percentage Rate (APR). The interest rate represents the annual cost of borrowing, while the APR includes the interest rate plus certain fees, offering a complete picture of borrowing cost. The loan term, usually 24 to 84 months, indicates the repayment duration. Check for any prepayment penalties, which are fees charged by some lenders for early payoff.

Determine the vehicle’s current market value. Reliable sources like Kelley Blue Book, Edmunds, or NADAguides provide estimated values based on the car’s year, make, model, mileage, and condition. Compare this market value against the outstanding loan balance to ascertain the vehicle’s equity position. Positive equity means the car’s market value exceeds the loan balance, while negative equity, or being “upside down,” occurs when the loan balance is greater than the car’s value. This equity calculation helps evaluate strategies to exit the loan.

Selling or Trading In Your Vehicle

Using the vehicle to address the outstanding loan is common, either through a private sale or dealership trade-in. A private sale allows the seller to potentially achieve a higher price compared to a trade-in value, which can be advantageous if there is positive equity or to minimize negative equity. Preparing the vehicle for sale and marketing it to buyers is required.

Once a buyer is found, obtain a payoff quote from the lender. The buyer’s payment, or a portion thereof, is then directed to the lender to cover this payoff amount. Once the loan is fully satisfied, the lender will release the lien on the vehicle, and the title can then be transferred to the new owner. If the sale price exceeds the payoff amount, the seller receives the surplus; however, if the sale price is less than the loan balance, the seller must pay the difference to the lender to clear the loan.

Trading in the vehicle at a dealership simplifies the process, as the dealer handles the existing loan payoff. The dealership will appraise the vehicle and offer a trade-in value, which is then applied towards the purchase of a new vehicle. If the trade-in value is greater than the loan balance, the positive equity can reduce the cost of the new vehicle or serve as a down payment. If the vehicle has negative equity, the outstanding balance can be rolled into the new car loan, increasing its principal. While convenient, rolling negative equity into a new loan means paying interest on a depreciating asset and can immediately place the new loan in an upside-down position.

Modifying Your Loan Terms

Adjusting car loan terms can provide financial relief or align the loan with current circumstances. Refinancing involves obtaining a new loan to pay off the existing car loan. This strategy is often pursued to secure a lower interest rate, which can reduce the total interest paid and potentially lower monthly payments. It can also be used to shorten the loan term for faster debt repayment, or to extend the term to reduce monthly payment amounts, though a longer term usually increases total interest cost.

The refinancing process includes checking one’s credit score, as an improved score can lead to more favorable terms. Applicants gather necessary documents such as income verification, proof of residency, and details of the current loan and vehicle. Lenders then review the application and, if approved, the new lender disburses funds to pay off the old loan. Completing documentation and paying off the current lender can take two weeks to two months.

Direct negotiation with the current lender is another option, especially for those experiencing financial hardship. Lenders may offer loan modifications or temporary payment deferrals to assist struggling borrowers. A payment deferral allows a borrower to temporarily postpone payments, while a loan modification might involve extending the loan term to lower monthly payments or adjusting the interest rate. Proactive communication with the lender is important when facing financial difficulties, as documentation may be required. These discussions aim to find a mutually agreeable solution that prevents default and repossession.

Voluntary Surrender Considerations

Voluntarily surrendering a vehicle involves returning it to the lender when a borrower is no longer able to make payments. This action is initiated by contacting the lender to arrange the vehicle’s return. While a voluntary surrender might seem like a way to avoid the repercussions of an involuntary repossession, it is still considered a negative event on a credit report and has significant financial consequences.

After surrender, the lender sells the vehicle, usually at auction, to recover the outstanding loan balance. However, the sale price at auction may be less than the amount owed due to depreciation and auction fees. The borrower remains responsible for the difference between the outstanding loan balance and the amount the lender receives from the sale, plus any associated costs. This remaining amount is known as a deficiency balance.

A voluntary surrender, like an involuntary repossession, negatively impacts credit scores. The event will appear as a derogatory mark on the credit report and can remain for up to seven years from the date of the original delinquency. Lenders will pursue collection of the deficiency balance, which can lead to further credit damage if not paid. If the deficiency balance is not paid, the debt may be sold to a collection agency, or the lender could pursue legal action, potentially resulting in wage garnishment or other collection efforts.