How To Get Out of a Car Loan You Can’t Afford (2023)

If you need to get out of your car loan, there are a few things you can do. These include negotiating with your lender, refinancing your car, selling your car or entering voluntary repossession. Be aware that many of these don’t eliminate your auto loan payment but give you access to different terms and payment amounts.

1. Negotiate With Your Lender

When you’re in a tough financial situation, the first thing you should do is call your lender and talk about your options. You aren’t the first borrower to go through hardship. Lenders have policies in place for this, and you may be able to negotiate a break from payments, known as forbearance.

Your existing lender may also be able to change your monthly car payment amount with the expectation that you’ll bump it back up later on. It can help if you show the reason for the hardship and explain how you’ll be able to make higher payments in the future.

Are There Car Loan Forgiveness Programs?

Lenders are unlikely to completely forgive your loan unless you turn your car in (which we’ll talk about later on). They may work with you on your payment size or due date, loan terms or deferment instead. If you file for bankruptcy, you’ll need to give the car back because the lender still has a lien on the vehicle even though the loan is canceled.

Can Someone Take Over My Car Loan?

Someone can’t just take over your car loan with the exact terms you have. A minority of lenders do allow auto loan transfers, but the secondary owner needs to apply for the loan and be approved. If your lender doesn’t allow a transfer, which is likely, you may be able to refinance the loan into the other person’s name or have them co-sign on a refinance loan and cover the payments.

2. Refinance Your Auto Loan

The second-best option is to refinance your auto loan. In an ideal situation, you can get a lower interest rate now than when you bought the vehicle. This way, you can get a lower monthly payment and save money on the refinanced auto loan.

Source: Capital One

However, you might not be able to get a better interest rate, especially if you’re behind on payments. You can still refinance your car with an interest rate that’s the same or even higher than before, but you’ll pay more for the car in the end.

The advantage of refinancing is that you can get a lower payment and make your auto loan a bit more manageable. You’ll keep the car, and you’ll have a new loan with new terms. In many cases, you’ll also have a short break from payments — usually between 30 and 90 days.

3. Pay Your Loan Off

If it’s feasible for you, paying your loan off is one way to get out of your car loan and keep your credit score intact. Here a few ways to pay your car loan off early:

• Pay the remaining balance in full
• Make periodic payments above the required amount
• Round your payment amount up to the nearest $50 or $100 each month

What’s the Best Way To Pay Off a Car Loan?

If you want to pay your car loan off, make sure there aren’t prepayment penalties or that the penalties don’t outweigh what you’d save in interest. Paying the rest of the loan in cash will save you the most in interest, but you can also benefit from making larger payments periodically

4. Sell Your Car

Another way to get out of your car loan is to sell your car. Ideally, you owe less than your car is worth and you can pay the loan off with the sale. Before you list your vehicle, contact your lender to get a payoff amount.

If your lender is a bank, you may need to complete the paperwork at a bank location with the buyer. If you used an online lender, then you may need to complete the sale at a partner bank’s location.

You’ll get out of your car loan once you pay the lender off and complete the sale. If you’re upside down on the loan, you’ll need to cover the negative equity yourself or take out a personal loan to do so.

5. Opt for Voluntary Repossession

In some cases, refinancing your car may not be enough to get you through. To get out of your car loan completely, you can turn your car in with a voluntary repossession.

Can You Give Your Car Back to the Finance Company?

With a voluntary repossession, you’re giving the finance company possession of your car. This is better than a standard repo because you’re working with the lender to give back some of what you borrowed through the vehicle’s value. However, this isn’t an ideal option because you aren’t paying the loan back in cash.

How To Give Your Car Back Without Ruining Your Credit

Unfortunately, giving your car to the lender will hurt your credit. It won’t hurt your credit as badly as a full-on repossession, but you’ll still take a hit. To have a better outcome, make sure you aren’t upside down on the loan. You can also get a better outcome if you can afford to pay a portion of the loan off when you turn the car in.

6. Options of Last Resort

These last two options should be avoided if at all possible: defaulting on the loan or filing for bankruptcy.

Default on the Loan

If you do nothing for long enough, you’ll simply default on the loan. This is the worst-case scenario for an auto loan. Default requires you to take no action and to ignore the calls from your lender.

Lenders don’t want their customers to default. While it’s hard, we recommend answering the phone and reaching some sort of agreement with the lender before it’s too late.

If you default, your credit will take a severe hit and will be affected for seven years. The lender may also repossess your vehicle depending on your situation. You’ll have a hard time finding other credit while that account is on your credit report.

File for Bankruptcy

You may consider filing for bankruptcy if your financial situation is dire. However, this won’t automatically get you out of your car loan debt. And if you do get out of it, you may lose the car in the process. A judge can grant relief in some cases, but each situation is different. We recommend speaking with a personal finance advisor to make the best decision.