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There are many costs people forget to take into account before applying for their car loan, such as the cost of interest. Similarly, while they might be able to afford the loan payments initially, something else might happen further down the road 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 this is the case, there are a couple of different ways of dealing with a car loan before it gets completely out of control.
Yes, you can get out of a car loan in a number of ways. You can either choose to:
But firstly, it’s good to understand one of the main reasons why a borrower will try to get out of their car loan – the upside-down car loan.
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.
This is a problematic occurrence with pricier, luxury models in particular. A buyer will jump at the chance of the seemingly low monthly finance payments, failing to consider what it will actually cost them in the long run.
If you’re thinking about trying to get out of your car loan contract because of the possibility of it becoming upside-down, it’s a good idea to get an estimate of the car’s current market value, before jumping to any conclusions.
You can likely find a number of websites that will calculate the value of your car, based on certain criteria like the make, model, color, etc. However, if you can also get a basic estimate by checking the mileage, going over the car’s various features and what shape it’s in, then look at used car classifieds and websites to see what cars similar to yours are currently going for.
Once you’ve determined your car’s market value, calculate how much you have left on your loan, making sure to factor in the interest costs. If your loan payments add up to more than the car is worth, you might want to consider getting rid of your car loan.
Whether you want to get out of a car loan due to negative equity or the prospect of getting a new car, there are a few ways you can get out of your current car loan.
One option that you can choose, should the cost of the loan payments become more than you can handle, is to attempt to transfer the loan to another buyer. If you manage to find a friend or family member that is able to take on the loan payments, it’s possible for you to get a new contract and sign it over to that person.
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.
Another option involves selling your financed car to a private individual or by trading it in at a car dealership. Depending on your financial situation and needs, one option may be more suitable than the other.
Sell It Privately – When money is tight and you just want to get rid of your car loan, selling it may be the best option. By selling your car, you can use the money from the sale to pay off the car loan.
However, since the lender will have a lien on your car even after you sell it (that is until you pay off the loan), buyers may be hesitant to purchase the car from you. To alleviate some of the apprehension they may be feeling, you can tell the buyer they can come with you to the bank, so they may witness you paying off the car loan.
Trade It In – If money is tight, but you still need a car, you can opt to trade-in your car for a cheaper option. The money you get from your trade-in can be used to pay off your old car loan and as a down payment (if you have any left after repaying your old car loan) for your new car loan.
This option should only be used as a last resort. If you can’t manage to transfer the loan to another buyer and payments are still becoming too hard for you to deal with on your own, you might need to contact your lender and inform them you’re choosing voluntarily repossession.
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.
Just be aware, repossession, even if it’s voluntary comes with consequences other than the loss of your car.
This is likely going to the most reasonable and convenient path you can take if you feel that your car loan is costing you too much. The simplest solution, refinancing your car loan or renegotiating your payment plan with your lender, then paying off the balance of your car so that it will stress you no longer.
Remember, you defaulting on your payments will cause the lender a lot of issues and cost them money to deal with the process of repossession or any other legal actions. The easiest thing for both parties would be to figure out a solution where you can pay off your balance without the hassle that comes with the other alternatives.
Discuss refinancing options with your lender. If the monthly payments are too expensive, rest assured, you’ll be able to find a more reasonable rate of payment to suit your financial needs. The same goes for re-negotiating your payments in other ways.
Depending on your chosen lender, you can also increase your payments or pay in several lump sums. While this might not seem appealing at first, if you have the money necessary to do so, it might actually be better for you, because you’ll end up paying less in interest, helping you pay off the loan and get out of debt faster.
Cars, whether they’re new or pre-owned are a big responsibility and a big expense. There are many different costs to factor in, such as fuel, insurance, oil changes, repairs, tires, etc. Not only that, but you’ll need to consider other elements, like where you’re buying the car from, what your warranty will cover, if any, and of course how you’re planning to pay for the car in the first place.
Depending on your current income and how expensive the car is, it can take years to finance completely, so it’s common for many would-be car owners to apply for a car loan. A car loan, like any kind of loan, is a system that allows a buyer to pay off the total value of the car in monthly installments, making it more affordable. However, while affordable, it does come with certain costs. Be sure to factor in the interest and fees of getting a car loan.
When you’re having financial difficulty and are not sure if you’ll be able to afford your car loan, the stress of it all can cause you to make rash decisions. However, the best thing you can do is to stay calm and get ahead of the situation by discussing it with your lender. Since your lender will likely not want to go through the motions of repossessing the car or having you transfer the loan to another borrower, they will be open to negotiating a solution to the problem. Overall, what they want more than anything is to be repaid in full, even if it takes fewer or more years than was originally planned.
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Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
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