Hundreds of thousands of Americans use cars every day. According to the data issued by the American Automobile Association, 79% of workers who own a vehicle use it to travel to work. Many of these drivers also have a car payment.
What about if you’d rather not shell out that type of money anymore on car payments every month?
Fortunately, you can find a way to get out of a car loan before defaulting. Read on to learn about why you may default and what you can do to prevent it. We’ll also examine what happens if you live beyond the loan limit and what to do about your financial security.
When should you consider getting out of a car loan?
There are many personal reasons why someone might want to get out of a car loan. For most drivers, getting out of a car loan involves cost. If you don’t make your car payments, you could soon lose your vehicle.
Let’s take a look at some instances in which you might want to get out of an auto loan.
Job loss or change
Losing your job is a financially devastating setback – even if you possess a healthy savings account. When your employment is lost, you immediately lose all or part of your monthly income.
You must figure out how to pay for your expenses with the funds you already have. A car loan that was originally affordable when you had to work may now be unaffordable.
Whether you acquire a divorce amicably or through contentious proceedings, it is expensive. The initial costs of divorce, such as attorney fees, could reduce your income.
You could be going from a dual income to a single income. This could make it challenging to meet the monthly car payment.
There are so many things to consider as you prepare to welcome your new baby. One you don’t want to forget is your vehicle. You need an automobile that is safe and convenient for a growing family.
This could indicate that you should get rid of your previous car and lease a vehicle that matches your new lifestyle.
Increase in other expenses
Rising household expenses might overwhelm your auto loan. For example, inflation may drive up the cost of food and gas. Your new budget may not be sufficient to pay for your current car-loan payments.
Perhaps you recently moved to a new home. With the higher mortgage payment, you are no longer able to afford your vehicle payment.
5 Ways how to get out of a car loan
Fortunately, if you decide to get out of a financed car, there are numerous options. There are many effective ways to get rid of your auto loan.
However, various programs have various strengths; some are much better than others regarding your credit and finances. Thorough comparison of the various plans available is essential before you decide which program to take part in.
Here are the top ways to get out of an auto loan:
1. Pay the loan in full
The easiest way to get out of a car loan is to pay it off entirely. Paying off your car loan closes the loan. You’ll own your car outright and will only need to pay for routine maintenance, repairs, and insurance.
The downside of paying off the loan in full is the cost. If you are unable to pay off the loan, it is unlikely that you have the funds to do so. And you should have access to some of your savings if you want to utilize a Portion of your savings.
You should also check whether your lender has any prepayment penalties. Prepayment penalties are fees that your lender may charge you if you pay the loan off early.
2. Trade in the vehicle
Trading in your vehicle is a further way to escape from an auto loan. Car dealerships frequently allow you to trade in your current vehicle when buying a new or used car.
The value of your trade-in is subtracted from the price of your new vehicle. Your dealer will pay off your existing loan, and you’ll have no other financial obligation.
However, there are many things to keep in mind when trading in your car.
Trade-in prices are typically lower than the price you would receive selling your car privately. However, you can use a website like Kelley Blue Book to find out what your vehicle’s value is before trading it in.
Also, trading in your vehicle does not guarantee that your next vehicle is inexpensive. You may have to take out a new loan for your new vehicle.
But you can reduce your auto loan payments by buying an inexpensive and reliable car that fits your needs.
There’s also the possibility that you owe more on your car loan than your vehicle is worth. This is when you owe more than the car is worth on your loan. You’ll have to cover the remaining balance or roll it into your new loan.
For example, you want to obtain a car with a $15,000 balance remaining on the loan. The dealer only offers $10,000 for the car. You can pay the remaining $5,000 or add it to your new loan.
Inferring that adding funds to a car loan implies you are also paying for interest is incorrect.
3. Sell the car outright
Selling your automobile privately is another way to get out of a car payment. Once sold, you can pay off the loan entirely.
Advertising a used vehicle privately typically results in higher profits than trading it to a dealer. And with online sales platforms, a large number of buyers can easily view and acquire your used car.
There are numerous drawbacks to selling your car yourself. For example, you will not be replacing the vehicle in the sale. If you depend upon your vehicle to drive, you will have to find an alternate means of transportation.
There is also more work to be done when selling your car yourself. You must take attractive photos of the car and write the description. Then you will need to post it to a marketplace, make a flier, or take out a local ad.
You’ll also have to meet with prospective buyers to allow them to see the car. You may find that the endeavor is not worth the higher price.
4. Refinance your auto loan
Do you love your current car and don’t want to get rid of it?
You could be able to keep your payment lower by refinancing your auto loan. Refinancing is the act of obtaining a fresh loan with more favorable terms. Using your new loan proceeds to pay down the remaining balance of your previous loan helps pay off your outstanding debt.
Refinancing can allow you to get better loan terms or get your loan made more affordable. For instance, many people refinance their loans to obtain a lower rate of interest. Another option is to refinance to extend the loan term and reduce your monthly payments.
Refinancing a loan may not always be the best option. When you refinance, your credit score can take a hit. Your lender will first request a hard credit inquiry to determine your creditworthiness before providing you with a loan.
This has a tendency to lower your score – perhaps temporarily.
Second, opening too many new accounts within a short time period may result in lower credit scores. Lenders may conclude you need to open new accounts to maintain your debt.
Another downside of refinancing is the negative impact on your credit score. Additionally, you need to be aware of any changes in your finances and cash flow as a result of a loan.
A longer loan term may lower your monthly bills, but you will be in debt for longer. New loan charges, including origination fees, may also offset your savings.
If you have $10,000 and 3 years (36 months) remaining on your car note, you want to refinance to reduce your monthly payments.
You apply for a 5-year (60-month) loan for $10,000. The loan funds pay off your current auto loan and you begin making payments on the new loan.
5. Surrender the car voluntarily
Auto loans use your car as collateral. If you can’t make your payments, your lender may take your car to pay off your debt. Vehicle repossession can cost you a fortune – to your credit and your personal finances.
If you realize that you’re going to lose your car soon, you might want to consider voluntary repossession. Unlike a standard repossession, voluntary repossession is when you decide to offer your car to your lender.
You’ll arrange a time and place to deliver the car. In most cases, voluntarily supplying your car is a better option than letting your lender repossess it.
You will know when your tow truck will arrive. You may also save money on a potential towing or storage fee from an involuntary repossession.
While giving my car away is a way to get out from under a financed vehicle, you should carefully weigh the pros and cons before doing so.
Voluntary repossession is not a magic wand to get out from under a financed car. You still owe the money. Your lender will sell your car, but you will still be responsible for any remaining balance.
You owe $10,000 on your loan. Your lender sells your car for $8,000. You must still repay the remaining $2,000.
If you have difficulty paying your mortgage, your lender may send it to a collection agency. Having a collection account on your credit report can hurt your score.
A voluntary repossession is still considered a default on your loan. This means it can be used on your credit history for up to seven years. This tag may increase your chances of being deemed a high-risk borrower.
You’ll have to work harder to find a loan and your interest rates will be higher. The good news is that your credit score will reflect your repossession as voluntary.
You may find a lender who is willing to consider this when you search for another loan. While a voluntary repossession is usually a last resort, it is normally better than involuntary repossession.
This time, we will show you how to get out of a financed vehicle. But there are several things you should consider first. So let’s take a look at what you need to know when learning how to get out of an auto loan.
4 Things to consider when getting out of a car loan
Even if you have to rent a car to get around, the procedure can be difficult. You will have a lot to consider, but the following tips will make the process easier.
1. Try to negotiate with your lender
Note that not all loans are fixed. Begin by negotiating with your lender before you select how to get out of a loan. You may be surprised to find that not all of your loan options are set in stone. Many lenders prefer to deal directly with borrowers instead of going to auctions.
Depending on your lender, you might be able to negotiate the terms of your loan.
This is especially true if you’re facing short-term financial difficulty. For example, you’ve been furloughed from your job. Your lender may suspend your payments or allow you to make interest-only payments while you’re out of work.
2. Know the downsides of getting out of a car loan
Prior to deciding how to get out of an auto loan, make sure you understand what the results will be.
Refinancing a loan often leads to a lower credit score, but you will still keep your vehicle. You won’t have any trouble finding alternate transportation when looking for a new vehicle.
On the other hand, selling your vehicle to a private individual may enable you to get out of your loan without harming your rating. You could even end up with additional money from the sale.
But once you receive your next vehicle, you’ll have to get to and from work, the grocery store, and other responsibilities until it’s delivered.
3. Consider your options before defaulting
You should always stay current with your loan payments. In order to do this, you should consider all your options before settling on a decision. If you feel that your expenses are too expensive, you should begin making your Plan B.
If you default on a loan, it will hurt your credit score for years. Consequently, you might face higher loan rates in the future if a lender approves you.
Understand your options before you make your payment so you never miss a contribution.
4. Avoid overspending on your next loan
After paying off your current loan, you should begin planning for the future so you don’t overspend on loans.
The more money you are able to put toward your automobile purchase, the less you need to finance. Saving up for a car now will make it simpler to finance when the time comes to purchase.
You may find yourself able to purchase your next vehicle outright, which may be useful for a depreciating asset.
Since a longer loan term can lower your monthly payment, you might end up paying more overall. Longer loans often carry higher interest rates, so you will ultimately pay more than you would with a short-term loan.
Let’s say you have two $10,000 loans. The first is a three-year loan with a 3% interest rate. Your monthly payment is $221, and you will pay $624 in interest.
The second loan is a 7-year loan with an 6% interest rate. You will only pay $146 per month, but will pay a total of $2,271 in interest.
A high credit score allows you to get lower interest rates on auto loans. How? It gives you access to greater interest rates and better loan terms.
Think about those car commercials that advertise 0% interest rates. If you listen carefully, that is usually followed by “for well-qualified borrowers.” That typically means you’ll need a good credit score and credit rating to qualify.
However, improving your score takes time because the most important factor in your score is timely payments. The sooner you begin, the sooner your payment history will show positive payment history.
Leverage this tips on how to get out of a car loan that’s unaffordable!
There are many ways to get out of your car loan if you no longer want the car. Whether you can pay it off or need to refinance, make sure you explore all options.
Knowing which solution is appropriate for your budget can help you act immediately and reduce your risk of falling behind on your loan.