People often forget to take into account many costs before applying for a car loan, such as the cost of interest. Similarly, while they might be able to afford the loan payments initially, something else might happen later that makes paying more difficult. Loss of employment, decreased income, and all manner of other financial emergencies might arise, making the car loan payments harder to afford.
If you’re struggling to keep up with your car loan payments, you may be able to get out of your car loan to avoid the risk of default.
Key Points
- You may consider getting out of your car loan if you’re having trouble covering your loan payments, have negative equity in the vehicle, or simply want to reduce your debt.
- Ways to get out of a car loan include refinancing the loan, selling or trading in your car, and transferring the loan to someone else.
- You may need your lender’s permission to back out of your car loan.
How To Get Out Of A Car Loan
Yes, you can get out of a car loan in a few ways, such as the following:
Negotiate A New Payment Plan
While this may not necessarily get you out of the loan, the simplest solution may be to speak with your lender and negotiate a new payment plan that better suits your finances. Lenders will want to do what they can to avoid the potential for a borrower to default on the loan. As such, your lender may be open to discussing a potential restructuring of your loan agreement.
Keep in mind that renegotiating the loan will likely mean that you’ll pay more interest over the long run.
Transfer The Loan
If your lender allows it, you may consider transferring your car loan to someone else. Also known as loan assumption, this allows another person to take over your car loan. You’ll need to arrange this plan with your lender, and the person taking over the loan will need to meet the lender’s loan criteria.
Similarly, if you’re leasing the car, you may be able to transfer the lease to someone else. A lease transfer allows another person to take over the remaining lease payments, which gets you out of the lease contract. Keep in mind that you may need to pay a lump sum to the person taking over the lease for them to take it over.
However, this is not always an option with some lenders, banks and financial institutions included, because their protocols for borrowers can be strict. Since the lender is already taking a financial risk when letting someone borrow from them, they might not want to take on another, in case the new signer also fails to keep up with payments.
In fact, if you don’t make sure that this new borrower signs all documents over to themselves, making them legally bound to the contract in your place, you will still be held responsible should they default on the loan.
Sell The Car
Selling your car can help you get out of your car loan. If you can sell your vehicle at a price that’s equal to or greater than what you still owe, you can use the proceeds to repay your existing car loan. However, if you sell for less than the loan balance, you’ll have to make up for the difference out-of-pocket.
Alternatively, you may consider trading in your car to get out of your car loan if you plan to purchase another vehicle, ideally at a much lower price. The dealership will offer you a trade-in value, which you can use to repay your existing loan or apply it to the purchase of a new car. They would simply roll your old loan into the new one, so you may be paying more interest over the long run.
Refinance Your Loan
Refinancing your car loan can help lower your monthly payments and make the loan more manageable. By refinancing, you replace your current loan with a new one with different terms, such as a lower interest rate or a longer term. Just make sure you understand that a longer term will likely mean more interest paid over the loan term.
Give Back The Car
If you can’t sell your car or refinance the loan, you may consider voluntary repossession. This involves giving the car back to the lender to avoid involuntary seizing of the vehicle. Keep in mind that while this may help you get out of your car loan, it can still have a negative effect on your credit score and leave you responsible for covering any deficiency in the outstanding balance.
Your car being seized as collateral is an unfortunate consequence that can come with defaulted payments on any secured car loan. So, if you feel like you’re in danger of defaulting, it’s best to let your lender know right away and have the car repossessed willingly. If not, you could be subject to the actions of a collection agency and or have your vehicle repossessed.
Do note that you’ll still owe the difference from the selling price and the outstanding loan.
Learn more: How Do I Voluntarily Surrender My Car?
Reasons To Get Out Of A Car Loan
There are a few reasons why you may want to back out of your car loan before the end of the term:
Strained Finances
You may find it increasingly difficult to cover your car loan payments in addition to all other expenses you have to cover. Or, you may simply want to simplify your finances and reduce your overall debt. Getting out of your car loan can free up some funds in this case.
Changing Needs
Maybe your lifestyle or needs have changed over the years, and your current vehicle no longer suits your preferences. In this case, backing out of your car loan may allow you to pursue different options.
Negative Equity
An “upside-down” car loan, sometimes referred to as “underwater,” means that the borrower owes more on their car loan than the car is worth, resulting in a position of negative equity. This can often happen with newer vehicles because their value will depreciate significantly right after they’re driven off the dealership lot. As the years roll by, the car market fluctuates and the car’s value goes along with it.
How To Determine Your Car’s Current Market Value
If you’re thinking of getting out of your car loan by selling it, trading it in, or refinancing, it’s a good idea to get an estimate of your car’s current market value.
You can likely find a number of websites that will calculate the value of your car, based on certain criteria like the make, model, colour, etc. You can also get a basic estimate by checking the mileage, going over the car’s various features, and its condition, then look at used car classifieds and websites to see what cars similar to yours are currently selling for.
Learn more: What Is My Car’s Value In Canada? 5 Ways To Find It
Understanding Your Car Loan
Before discussing the ways to get out of your car loan, it’s important to understand the terms of your loan contract and the costs associated with a car loan:
- Principal Balance: The amount you borrow to purchase a vehicle.
- Interest Rate: The rate your lender charges for the loan.
- Loan Term: The length of time that you have to repay the loan.
- Monthly Payments: The amount you need to pay every month.
- Prepayment Penalties: Fees charged for repaying the loan early.
Other Costs To Consider When Purchasing A Car
Whether they’re new or pre-owned, cars are a big responsibility and expense. There are many different ongoing costs to factor in, such as:
- Insurance
- Gas
- Maintenance and repairs
- Extended warranties
- Parking fees
Final Thoughts
If you’re having financial difficulty and are not sure if you’ll be able to afford your car loan, you may consider getting out of your car loan. In this case, you may want to start by discussing your situation with your lender to see what options are available to you. If your lender is unwilling to negotiate, you may consider selling your car or refinancing the loan.
