Getting a car loan is a convenient way to buy your own car if you cannot afford to pay for it in cash. However, some circumstances may arise in the future that will make meeting your monthly car loan obligations difficult for you.
Fortunately, there are things you can do to avoid aggravating your situation, and the possibility of completely defaulting on your loan. These include paying off the entire balance early, selling your car, negotiating with your lender, getting the car refinanced, and opting for a trade in.
Before deciding on which direction to take, you must first understand how each option works, and how they can affect your overall finances and your credit standing.
Read on as we discuss how you can get out of a car loan you can’t afford, as well as the available options.
What Happens If You Finance A Car and Can’t Afford It?
If you’re unable to pay off your loan, your lender may exercise the option to repossess the vehicle. This will be harmful to your credit score. It is therefore important that you immediately contact your lender to discuss what options are available to prevent repossession.
5 Ways – How to Get Out of a Car Loan
Unless there was bad faith from the start, nobody obtains a car loan only to intentionally default later. However, future circumstances may make things difficult for you to cover your monthly obligations. You have several options if you get yourself in this situation.
Best Way - If possible, Pay off the car Loan early.
Paying the entire balance early is your best option. Ask your lender if you will be charged a penalty for prepayment. Otherwise, start making bigger payments so you can settle your loan early. Once you have full ownership of the car, you can sell it, trade it in, or keep it.
After paying the loan in full, the lien will be lifted on the electronic title, and the lender will send a letter of confirmation. Depending on the state, you may get the title by mail.
Early loan payment may not always be viable since you are already having difficulty paying the loan in the first place. However, this option may be possible if you can make enough by cutting down on your other expenses.
Key Takeaway:
It isn’t recommended to dip into your other savings like your retirement fund just to pay your car loan. This may only lead to a bigger financial crisis.
Better way - Renegotiate the loan terms.
You need to act before you actually default on your payment. Call your lender at once to negotiate for a new payment plan. This option is ideal if you are in good credit standing, and only need temporary help.
So, before negotiating with the lender, assess your finances, and determine the monthly payment you can cover conveniently for the rest of the loan term.
Key Takeaway:
Negotiate for easier terms with the lender before you default on your payments. By then, it might be too late to avoid repossession.
Good Way - Refinance the Car loan.
Refinancing your car loan may give you lower monthly payments or better terms, or both.
With a lower interest rate, your monthly installments will be lower. Your overall debt will also be decreased. However, this may not be a good option if you have bad credit or you’re behind on your payments.
You can get lower monthly payments with a longer repayment term, but you’ll pay a higher total interest.
Refinancing is ideal with improved credit score after signing off the loan contract. A good credit score qualifies you for more favorable interest rates and terms.
Be wary of fees that come with refinancing such as a penalty for prepayment.
Key Takeaway:
Go for this option if you think you’ll be able to manage your loan with a longer term and/or lower interest and monthly installments.
Considerable Way - Sell the Car.
You can sell your car, and use the proceeds to settle the loan. However, you need to first seek approval from the lender since you don’t have the title under your name. Let the lender know you’re interested in selling the car, and ask for the required documentation, transfer process, and the credit application the buyer needs to accomplish.
Selling your car is similar to a trade in at a dealership, and it is not as complicated as a private sale. Transacting with a dealer, however, usually results to lower proceeds.
You can also explore the possibility of selling to a family or friend, if approved by the lender. You will still shoulder the remaining loan balance.
Key Takeaway:
Try to sell for an amount approximate to the loan balance. This way, you’ll have as little remaining balance as possible to worry about.
Optional Way - Trade in the car.
Go to a car dealership to explore the possibility of trading your car with a cheaper vehicle. Sites like NADAGuides and Kelly Blue can help you determine your car’s current market value. You’re upside down on your loan if you owe more than the value of your vehicle.
If you go for trade in, but cannot pay the remaining loan balance, the lender will simply add the negative equity to the balance of your new car loan. Thus, your total loan would be bigger compared to your balance if you’re only paying for the new car.
Key Takeaway:
Trade in is an easy and straightforward way to get out of a car loan fast. However, it isn’t a good option if it will only lead you to a cycle of debt.
There’s always time to get out of a car loan you can no longer pay off – especially if you’re not yet in default. Understand all your options well, and choose the best based on your current financial situation.
What Not to Do with a Car Loan
There are available options to get out of a car loan that you should consider only as a last resort, as these can harm your credit score and negatively affect your credit standing.
Avoid the following at all costs:
Agreeing to voluntary car repossession
Intentionally underpaying or not paying the loan
How to Get Out of a Car Loan without Damaging Your Credit?
There are only two options that will let you keep your car while not damaging your credit score. One is to call your lender and request for leniency, or to get car loan refinancing.
Selling your car can help you get away from a car loan without harming your credit if you can get an amount that is almost equal to your loan balance.
Final Verdict
If you can no longer afford a car loan , it is never too late to walk away from it. Take the time to learn about all the options we presented in this post and then choose the best one for you based on your financial situation.
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