How to get out of a car loan

Can’t keep up with your car loan payments? Here’s how to get some relief.

Anna Swartz 1600

Anna Swartz

Published May 30, 2019

KEY TAKEAWAYS

  • If you can't afford your car loan payments, you have some options

  • Refinancing with a new loan or renegotiating your current loan may be possible

  • You can also sell your car to pay off your loan

Most buyers who purchase a new or used car can’t afford to pay for it all up front, so they buy it with the help of a car loan. Car loans are a fairly simple concept — another party lends you money to help you buy a vehicle, and you agree to pay back the loan over time, plus interest. You and your lender will also agree on the amount of time you have to pay back the loan and how much you’ll pay each month.

But what happens when you can’t keep up with your auto loan payments? If you’re feeling overwhelmed or if you’re finding yourself in the red each month because of your car loan, don’t panic. You have several options that can help reduce your monthly payments to a more manageable amount, or you may want to consider giving up your current car altogether.

In this article:

Refinancing a car loan

One option you have if you’re finding it hard to keep up with your loan payments is to refinance your auto loan. Refinancing a loan basically means you replace your current car loan with a new car loan. The new loan pays off your old one, and you’ll have a new lease agreement.

Why should I refinance a car loan?

Refinancing to a loan with a lower interest rate can help you save money over time, while refinancing to a new loan with a longer term can lower your monthly payments, although you may wind up paying more over the life of the loan.

It’s important to note that refinancing a car loan can come with some additional fees, and can have a small negative effect on your credit score. But if you’re able to get a better interest rate on a new auto loan, or if you need to switch to a lease with a longer term so your payments will be lower, refinancing could make sense for you.

How to refinance a car loan

Just like when you first applied for your auto loan, you should shop around before you settle on an offer. You should also check with your current lender to see whether or not they’ll charge you a prepayment fee for paying off that loan early.

Once you’ve chosen a new loan, either with your current lender or a new institution, you’ll sign a new loan agreement. Your new loan will pay off your old one and you’ll begin making payments on your new loan instead.

Renegotiating a car loan

Another option if your current car loan payments are hitting your bank account too hard is to contact your lienholder, meaning the party that owns your loan, and see if you can renegotiate the terms of your auto loan. You’ve got the best shot at successfully negotiating a new payment plan if you contact your lender before you get behind on your loan.

You should also figure out how much you can realistically pay each month and come up with a plan to suggest to your lender. Many lenders will be open to working with you to renegotiate a loan, but there are no guarantees that they’ll agree to give you a better deal than you currently have.

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Do you have a car loan? A car insurance policy can help protect your investment.

If you have a car loan, you still have to pay back the loan even if the car is damaged, totaled, or stolen. But with car insurance, you can get reimbursed for a loss and keep making your car payments. Policygenius can help you find a car insurance policy that works for you.

Selling a car with a loan on it

If you really can’t keep up with a car loan, you always have the option of selling your car. Selling a car when you’re still making payments on it can be tricky, but it’s definitely doable. One option is to take your car to an auto dealership. Dealerships are used to buying cars that still have liens on them. They’ll work with you and your lienholder, and when they buy your vehicle they’ll pay off the remaining balance on your car and give you the rest of the value.

You can also sell a car to an individual buyer while you still owe money on it, but it can be slightly more complicated. You’ll need to work with your lender and with the buyer to essentially complete two transactions at once: Using the money from the buyer to pay off the remainder of your loan, and then signing over your car to the new owner.

If you took out your auto loan through a bank or credit union, you may want to conduct the sale at a brick and mortar location so that you, the buyer, and your lender can all be in the same place.

Once you’ve sold your car, you’re free to get a more affordable vehicle or, if possible, find alternatives until your budget allows you to own your own car again.

What to do if you’re upside down on your car loan

All of this advice becomes slightly more complicated when you’re upside down on your auto loan. That means you owe more money on your car than the vehicle is worth. This isn’t necessarily a problem if you can continue to make your payments — although it’s certainly not ideal to owe more money on your vehicle than the car is worth.

Being upside down on a loan becomes much more of a problem if you’re also struggling to afford your monthly payments. In this case, you can still try to refinance to a better deal, but it may not be possible to refinance to a better offer. You can also still sell your car when you owe more on it than it’s worth, but you’ll have to deal with paying off the difference between your car’s value and what’s left on the loan.