Get Out of a Car Loan
Whether your car payments have become too expensive or you are just ready to buy a different vehicle, you may feel the need to get out of your current car loan. One of the most common obstacles to getting out of a car payment is negative equity. Negative equity occurs when you owe more on your car loan than the car is actually worth, like, for instance, if the value of your car depreciated due to damage. This short guide will help you assess the state of your loan and decide on an option for getting out of your loan that's right for you.
Steps
- Find your car's market value. Since negative equity is the biggest, most common obstacle to getting out of a car loan, it's a good idea to begin by determining whether you have negative equity or not. To do this, you'll need to figure out what your car is currently worth. For a quick estimate of your car's value, use an online valuation service like Kelley Blue Book or NADA Used Car Guides. These free sites can quickly and easily provide you with an estimate based on your car's make, model, and condition.
- You may also want to search classified ads and visit used car dealerships to see what price your car (or similar cars) are fetching.
- To get a more precise value for your car, know your car's mileage as well as any optional features (power windows, sunroof, etc.) that it's equipped with. Generally, a higher mileage corresponds to a lower value, while optional features can modestly boost a car's value.
- If your loan isn't upside-down, sell your car. Depending on how many payments you've made on your car and/or how your car's value has fluctuated, it may, in fact, be worth more than the amount you still owe on your loan. In this case, you can sell your car and use the profits to pay off the remainder of your loan. You'll be left debt-free, your credit will be untarnished, and you'll be able to pursue a new car without any difficulties.
- Contact your lender before selling your car - you'll be closing out your loan with your lender, so it's important that they're informed beforehand. Your lender will be able to give you specific instructions for closing your loan out - you may need to conduct the sale of the car at the lending institution so that you can immediately use the money from the sale to pay off the loan.
- If your loan is upside-down, prioritize. You may still owe money on your loan that can't completely be paid back by selling your car. In this case, you have several options, but you'll need to make decisions about what's most important to you. For instance, if you're trying to get out of your car loan in an effort to reduce your monthly expenses, you may need to make an up-front lump sum payment to cover the remaining balance in the loan after selling your car. If you simply want a new car, you may need to compromise in terms of how much money you'll spend, paying more for longer. None of the following steps will get you out of your loan and get you ownership of a new car and cost you no money and leave your credit history unscathed - they'll get you some of these things, but not all.
- Refinance. Refinancing is the process of setting a new loan agreement with your lender. This can also be referred to as "debt restructuring." If you're experiencing financial distress, it's preferable to refinance your loan, rather than defaulting on it. If your car loan is inflating your monthly expenditures, you may consider refinancing - you'll still have to pay a loan off, but the new loan may be easier on your wallet. Contact your lender to negotiate a refinanced loan - try to drop the interest rate or lower your monthly payments on the new loan to an amount your wallet is comfortable with. If the new loan makes the difference between whether you file for bankruptcy or not, it'll be very beneficial for your credit in the long term.
- A good credit score will improve the chances that you're approved for the new loan. If you can, spend some time living "lean" - saving money, paying off debts, etc. - as, over time, this will improve your credit score.
- Trying to refinance means that your lender will conduct a "hard inquiry" on your credit history to decide whether to approve you. The hard inquiry can have a minor negative effect on your credit score on the order of a few points. This usually goes away in several months, though the inquiry will be visible on your credit report for two years.
- Transfer your loan. Depending on your bank's regulations, you may be able to transfer your loan to a trusted party and let them assume your payments. This is a good choice if you want to sell a car that's not fully paid-off to a friend, having him or her assume payments. However, you need to be careful - don't simply trust the new owner to send you money every month or to make payments to the lender on your behalf. If the new owner isn't directly, legally responsible for the car's payments, you can still be held responsible if s/he decides to stop paying.
- A good policy is to have the new owner get approved for a new loan in the amount of the purchase price of the vehicle. They then pay you directly with this money, which you use to pay off your own loan in one lump sum (additional money may be needed if your loan is upside-down). Once your loan is paid off, you're off the hook and the new owner is responsible for making monthly payments.
- Don't forget - the new owner also needs to take responsibility for the car insurance policy!
- Lease a new car. If you're absolutely desperate for a new car but you just can't seem to come up with the money, consider leasing rather than buying. Talk to your leaser about rolling your negative equity balance into a new car lease. Because leases come with significantly lower payments than auto finance loans, it is possible for you to drive a new car and lower your monthly payments. If you make your payment every month and complete the full term of the lease, you will have paid off the upside-down loan, too. The downside, of course, is that you won't own the new car - you'll eventually have to turn it back in and either buy it at a residual value or lease a new car.
- Leasing has a variety of pros and cons. On the plus side, your up-front expenses will be cheaper due to lower monthly payments. You also most likely won't be on the hook for most major maintenance, depending on the terms of your lease. Finally, you'll get to drive a brand-new car every few years. However, insurance for leased cars is often significantly higher than it is normally. You can also get charged for excessive mileage and/or wear that results from normal operation of your car. Most leases have mileage allowances of 10 - 15 thousand miles per year. If you exceed this, you can expect to pay 10 to 25 cents per excess mile!
- Finally, leased cars aren't actually yours. If you get attached to your cars or you've made a hobby of "working" on your cars, you may not want to lease.
- Walk away. If there's nothing else you can do - you can't get approved for a refinanced loan, you can't sell your car to help pay your loan off, and you're in too much much financial stress to simply pay your loan off normally - you may, unfortunately, lose the car. Tell your lender you can no longer afford your payments and that you are opting for a voluntary repossession. You will lose your car and give your credit history a big red mark. However, by giving your car back willingly, you avoid being held accountable for the costs associated with your car being repossessed by a repo agency.
- The lender will take possession of the car, sell it at auction, and, if the money from the sale doesn't completely pay off the loan, file for collection on the remaining balance. If you do not pay your balance, a judgment will be entered against you for the amount you owe. Pay this balance - if you do, you may be able to get a "letter of satisfaction" from your lender, which shows future creditors that you did eventually pay back what was owed.
- A repossession, voluntary or not, will negatively impact your credit for years, making it more difficult for you to get approved for loans in the future and ensuring that the loans you do be more unfavorable (in terms of interest rates, down payments, etc.). If you can avoid defaulting on your loan, do it.
- Pay off the loan. Often, the best way to get out of a loan is simply to pay it off. In the long run, this is almost always the simplest and cheapest option. If you have the cash available, contact your lender right away. Usually, they'll be happy to negotiate a series of higher monthly payments or even a lump-sum transaction to allow you to pay off the rest of your loan. This is a great idea if you have enough cash in your bank account and you're looking to cut down on monthly expenses, like if you've recently moved to a big city and plan to use public transit instead of your car.
- As a general rule, paying loans off as early as possible is a good idea because it allows you to avoid interest payments which, over the normal life of the loan, can seriously add up. If you don't presently have the cash, seriously consider saving for months or even years to get the money to pay your car off completely. It's never a bad idea to make yourself debt-free.
Tips
- If you opt to sell your car in order to get out of your auto loan, try selling it yourself. You will generally fare better selling to a private party than you will trading it in at a dealership or selling it to a dealer.
Warnings
- Be aware that many of these options for getting out of a car loan will have a negative effect on your credit. If maintaining good credit or rebuilding bad credit is important to you, then you may want to consider holding on to your car until you can get out of the loan in a way that won't be detrimental to your credit score.
Related Articles
- Get Car Loans After Bankruptcy
- Calculate Auto Loan Payments
- Compare Car Loan Rates
- Get a Cosigner for a Bad Credit Car Loan
Sources and Citations
- http://www.leaseguide.com/glossary/upside-down-car-loan.htm
- http://www.bankrate.com/finance/auto/walking-away-from-an-auto-loan-or-lease.aspx
