How to Get Out of an Auto Loan

Auto loans help individuals purchase vehicles by spreading the cost over time. However, changing financial circumstances may lead borrowers to explore options for managing or exiting their loan obligations. Understanding available strategies is important for modifying or terminating a car loan.

Reviewing Your Auto Loan Details

Before taking action on an auto loan, gather specific details about the current agreement. Knowing the precise payoff amount is a primary step, differing from the remaining balance as it includes accrued interest, typically valid for about 10 days. Lenders provide this quote through online portals, monthly statements, or direct contact.

Understanding the annual percentage rate (APR) and remaining loan term provides a clear picture of borrowing cost and repayment timeline. The interest rate significantly influences the total amount paid. Determining the vehicle’s equity position, whether positive or negative, is also essential. Equity is calculated by subtracting the outstanding loan balance from the car’s current market value.

Positive equity occurs when the car’s market value exceeds the loan balance; negative equity, or being “upside down,” means the car is worth less than what is owed. Reputable online valuation tools like Kelley Blue Book, Edmunds, or NADA Guides can estimate the vehicle’s market value based on its make, model, age, mileage, and condition. Reviewing the original loan agreement for prepayment penalties is advisable, though these are uncommon for most auto loans. If a penalty exists, it is typically around two percent of the outstanding balance and may apply to loans 60 months or shorter.

Proactive Strategies for Loan Exit

Once auto loan details are understood, several proactive strategies can be pursued to exit the loan. Selling the vehicle involves paying off the outstanding loan balance to the lender. If selling to a private party, the borrower obtains a 10-day payoff quote and arranges for the buyer to pay the lender directly, or pays off the loan themselves, to receive the title. When selling to a dealership, the dealer handles the loan payoff and facilitates the title transfer. In cases of negative equity, the borrower must cover the difference between the sale price and the loan payoff amount out-of-pocket.

Trading in the vehicle is another option, often when purchasing a new car. The dealership assesses the trade-in value and applies any positive equity toward the down payment or purchase price of the new car. If negative equity exists, the outstanding balance is often rolled into the new car loan, increasing the principal and overall cost of the new financing. This can lead to a higher monthly payment or a longer loan term.

Refinancing the auto loan involves obtaining a new loan, usually from a different lender, to pay off the existing one. This strategy secures a lower interest rate, which can reduce total interest paid and potentially lower monthly payments. For example, in the first quarter of 2025, the average auto loan interest rate for new cars was 6.73%, while for used cars it was 11.87%. An improved credit score or a general decrease in market interest rates can make refinancing advantageous. The refinancing process requires an application, a credit check, and providing vehicle details like make, model, year, and mileage. Lenders may have requirements regarding the vehicle’s age or mileage, often preferring cars under 10 years old with less than 150,000 miles.

Working with Your Lender on Payments

When facing financial difficulties impacting auto loan payments, proactive communication with the lender is important. Engaging with the lender before missing payments can open various assistance options. Lenders may offer payment deferral or forbearance programs, temporarily allowing borrowers to pause or reduce monthly payments. During deferment, payments are typically postponed to the end of the loan term, extending the overall loan maturity date. While these options provide short-term relief, interest usually continues to accrue on the outstanding balance.

Another potential arrangement is a loan modification, where the lender may agree to change the original loan terms. This could involve extending the loan term, which can lower the monthly payment, though it might result in paying more total interest. Lenders may also consider reducing the interest rate in some cases. These arrangements are at the lender’s discretion and depend on the borrower’s specific circumstances and the lender’s policies. Contacting the lender early to discuss financial hardship can help identify available solutions and avoid more severe consequences.

Understanding Loan Default Outcomes

Failing to make scheduled auto loan payments can lead to loan default. A loan typically enters default after a period of missed payments, ranging from 30 to 90 days, depending on the loan agreement and lender policies. Some lenders may offer a grace period, usually 10 to 15 days, before assessing late fees or reporting delinquency to credit bureaus. However, once a payment is 30 days past due, it is commonly reported to major consumer credit bureaus, negatively impacting credit scores.

The most immediate outcome of loan default is vehicle repossession. Since the vehicle serves as collateral, the lender has the right to seize it once the loan is in default. Repossession can occur without prior notice in many states, and the lender is generally not required to obtain a court order. After repossession, the vehicle is typically sold by the lender, often at auction, to recover the outstanding debt.

If sale proceeds from the repossessed vehicle do not cover the full outstanding loan balance, including repossession and sale costs, the borrower may be liable for the remaining amount, known as a deficiency balance. Lenders can pursue collection of this deficiency balance, which may involve debt collection efforts or legal action. Defaulting on an auto loan and subsequent repossession can severely damage a borrower’s credit score, with drops potentially exceeding 100 points, and the negative mark can remain on credit reports for up to seven years. This credit damage can hinder future access to credit and loans.