How To Get Out Of A Car Loan – Forbes Advisor
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Whether you’re stuck on a car loan that you can no longer afford or are simply unhappy with your currently financed vehicle, there are a few ways to get out of the loan. For example, you could refinance the loan or sell the car and use the proceeds to pay off the loan.
Ultimately, the right option for you depends on how much your car is worth, how much you owe and whether you are in default on the loan.
If you’re wondering how to get out of a car loan, here’s what you should know.
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How do car loans work?
A car loan is a type of loan that is secured by the vehicle. While this added loan security can result in lower interest rates compared to unsecured loans, it also means you risk having your car repossessed by the lender if you default on your payments.
Auto financing is usually available from banks, credit unions, and online lenders. In the first quarter of 2022, the average interest rate on a new car loan was 4.07%, while the average interest rate on a used car loan was 8.62%, according to Experian’s “Experian’s State of the Auto Finance Market” report. The repayment periods are usually between 24 and 84 months.
When it comes to car loans, lenders often require a down payment. As a rule, it makes sense to deposit at least 20% of the purchase price for a new car and at least 10% of the purchase price for a used car. For example, if you’re financing a $20,000 new car, you should plan to make a down payment of at least $4,000.
If you are approved for a car loan, you make monthly payments until the vehicle is paid off. These payments are offset against principal (the amount of money borrowed) and interest (the cost of borrowing the money).
Can you get out of a car loan?
Yes, it is possible to get out of a car loan. However, all options for doing so require repayment of the loan or consent to voluntary withdrawal. If you have financed a vehicle and the buyer feels remorse, you cannot simply return the car and withdraw from the loan agreement.
How to get out of a car loan
There are a number of ways to get out of a car loan, with the right strategy for you depending on your unique circumstances and needs. Here are some possible options to consider:
Pay off the car loan early
If you have the cash on hand, paying off your car loan early could be the quickest way to get out of it. In addition, you save money on interest and can also help improve your credit score by reducing your outstanding debt.
Keep in mind that some lenders charge prepayment penalties if you repay your loan early. Be sure to check your loan agreement or contact your lender to see if you end up incurring any of these fees.
Refinance the loan
Refinancing is the process of taking out a new loan with a different term to pay off your existing loan. Depending on your credit rating, you may be eligible for a lower interest rate, which can save you money on interest and potentially help you pay off your loan faster.
You can also choose to extend your repayment period if you need to reduce your monthly payments. Just remember that this means you will have to pay more interest over the life of the loan.
Trade in the car
You may be able to trade your vehicle in at a dealership while you buy another car, even if you still have a balance on your car loan. In this case, the dealer would work with you to pay off the outstanding balance of the loan by factoring that amount into your total cost.
This can be one of the easiest and most straightforward ways to get out of an unwanted car loan. However, it’s not always an option — and it could lead to a cycle of borrowing.
sell the car
If you want to get rid of both the car and the loan, consider selling the vehicle outright and using the proceeds to pay off your debt. This might be a good idea if you’ve built up equity in your car, as you might be able to sell it for more than you owe, leaving you with some extra cash for a new vehicle.
But if you’re underwater on the loan — meaning you owe more than the car’s worth — you might not make enough from the sale to pay off the loan. In this case, you would have to pay off the remaining amount even though you no longer have the car.
Consent to voluntary withdrawal
If you can’t afford your payments and can’t negotiate other terms with your lender, you may choose to return the car to the lender — a process known as voluntary repossession. In this situation, you need to contact the lender to let them know you want to drop off the car and then make an appointment as to when and where you want to drop it off.
This can be much less stressful than an involuntary repossession, where a repossession agent sent by the lender takes over your vehicle at an unknown time. For example, the agent could impound the car at your home or place of work—or even a parking lot. On the other hand, handing over the vehicle voluntarily means avoiding this nerve-wracking chaos.
While both voluntary and involuntary withdrawals affect your credit score and stay on your credit report for at least seven years, there is a difference between the two on your credit report. If a lender manually views your credit report, the garnishment will be listed as voluntary, which may be considered more favorable compared to an involuntary garnishment.
Also remember that if you give up the car and the lender can’t sell it for enough money to recoup the remaining loan amount, you’re on the hook for the difference, known as a defect.
How to get out of a reverse car loan
If you owe more on your loan than the car is worth, your loan is considered upside down. This can happen if you invested very little in the vehicle when you originally bought it, or if the vehicle’s value is rapidly declining. An upside-down loan can make it more difficult to sell or trade in your car and be approved for a new loan.
If you find yourself with a reverse loan, first calculate how much negative equity you have in your car. To do this, subtract the value of your car from the amount you still owe on your loan. For example, if you owe $20,000 on your loan and your car is only worth $15,000, you have $5,000 in negative equity.
Once you know how much negative equity you have, here are a few options to consider:
- Roll the negative equity into a new loan. If you’re planning to buy a new car, you may be able to roll your negative equity into the new loan. This means that the negative equity is added to the new car price and you finance everything together. For example, if you buy a new car for $30,000 and have $5,000 in negative equity, you are financing the vehicle with a total of $35,000.
- Get a personal loan. If you’d rather not buy a new car right away, you can apply for a personal loan to cover the amount of your negative equity. This can be a helpful option if you have good credit—usually this means a score of 670 or higher—and can qualify for a low interest rate.
- Save to offset negative equity. Depending on your financial situation, it may make the most sense to save the money to offset your negative equity. This may take some time, but it will help you avoid paying interest for a longer period of time. Just make sure you continue to make minimum monthly payments on your loan.
What to do if you can’t afford your car payments?
It is important that you can afford a car before financing one. However, if your circumstances have changed and you are unable to make your loan payments, contact your lender as soon as possible. Depending on your repayment history and creditworthiness, the lender may be willing to lower your interest rate, reduce your monthly payments, or otherwise change your loan terms.
Some lenders also offer support options for borrowers who are struggling with financial difficulties such as losing their job. For example, you may be able to temporarily defer your payments or only make interest payments.
Can you buy a car without credit?
Yes, you can buy a car without a car loan. To do this, you need to save the money required to pay for the vehicle in cash. This might be difficult if you need a car fast or don’t have extra room in your budget to invest money in an auto fund – but remember that buying a car without credit also means you’re likely to save hundreds or thousands become dollars on interest.
You can also consider another type of loan if you prefer not to get a car loan, e.g. B. an unsecured personal loan. However, because this type of loan is riskier for the unsecured lender, you will likely end up with a higher interest rate than what you would pay for a car loan.
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