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How to Get Out Of a Car Loan

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated January 1, 2024​

4 min. read​

A car loan can take a lot out of your finances. A good rule of thumb is to allocate 10%-15% of your income towards a car loan. However, some people exceed this percentage or ramp up other expenses after getting the loan. Getting out of a car loan frees your cash and can lower your cost of living.

Car owners can use several strategies to get out of their car loans. We’ve outlined some of the most common choices below.

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Refinance Your Car Loan

Some borrowers can continue paying the loan if they get a lower monthly payment. A car refinance can make loan payments more affordable and feasible for your budget. You can extend your loan’s term to make lower monthly payments on your loan. Some borrowers can also use refinancing to secure lower interest rates. Your credit score likely increased if you stayed on top of monthly loan payments. You can use the higher score to get a lower interest rate.

Getting a refinance on your car loan can take a lot of time. Most people don’t want to submit numerous applications and reach out to local lenders.

Pay Off Your Car Loan

Some borrowers are near the finish line for their loan payments. One lump-sum payment or a slight increase in your monthly payments can make you debt-free sooner. Car and motorcycle loan borrowers can consider selling some of their assets to cover the remaining balance. This approach will free up space in your budget and alleviate your financial stress. Long-term investors may not like the idea of selling assets, but you accumulate assets to enhance your life. Sometimes, that can mean getting out of your car loan early.

Not everyone is in a financial position to pay off their car loan. You can ask for a higher monthly loan payment to speed up the process. If your boss will give you a bonus soon, you can consider allocating that bonus toward your car loan to get it off your budget. Make sure you get the title to your car after paying off the loan. The car title verifies ownership of the vehicle.

Sell Your Car

Selling your car provides you with a cash windfall. You can use the proceeds to pay off your loan and keep the extra money. Some car owners don’t mind selling their vehicle and may no longer need it. Older drivers may not go out as often and become comfortable with the occasional Uber ride. If a family has two vehicles and one family member retires, it’s less necessary to have two cars.

Each car borrower has different reasons for selling a car, but it’s a great way to get out of a loan. Since the vehicle technically isn’t yours, you will have to inform your lender about this decision. You’ll have to ask about the transfer process and the required paperwork to give the car to a new owner. The lender will have to approve the sale, and you will have to pay the outstanding balance before using the proceeds.

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Offer Voluntary Repossession of Your Car

Lenders don’t enjoy going after borrowers who fall behind on payments. The repossession process can get frustrating for both parties as it gets dragged out. Offering a voluntary repossession saves the lender time, and you may get a more favorable pay-off amount.

A voluntary repossession means less work to gather funds and no additional fees, but it comes at a high cost to your credit score. A repossession remains on your credit score for seven years and makes it more difficult to qualify for financing. You’ll have to rebuild your credit score, and lenders may ask about the repossession. A lower credit score will block you out of several financing options. In addition, lenders that accept your credit will set a higher interest rate for your loan. A higher interest rate can add hundreds of dollars to your monthly expenses.

A voluntary repossession also wipes out the equity you’ve built through on-time loan payments. If you buy a new car, you will have to start over with zero equity. One of the benefits of a loan is that you eventually become debt-free. You own the vehicle free and clear without additional lease payments. You deprive yourself of that opportunity by offering voluntary repossession of your car. Some borrowers get their repossessed vehicles back by raising enough funds, but most people seeking this option don’t reclaim their cars.

Default on the Car Loan

Defaulting on a car loan is the worst way to get out of a loan. A voluntary repossession gives you a slight chance of reacquiring your vehicle and won’t hurt your credit score as much as a default. The car lender will have to monitor your lack of payments and decide when to repossess your vehicle.

Borrowers considering a default may feel trapped in their financial predicament. Instead of immediately resorting to a default, contact your lender. Your lender doesn’t want you to default because they’ll lose money. Most lenders will work with you and create a plan based on your financial situation. They will look for a way to get you back on your feet and make monthly loan payments.

Defaulting on the loan will make it more difficult to obtain future financing. You’ll be surprised at what expenses increase due to a low credit score. Utility companies will see you as a riskier customer and raise prices. Even if you get a loan, the lender may not give you a high enough loan amount. Missing a few thousand dollars from the loan can force you to settle for a lower-quality car or home in the future. While not optimal, a voluntary repossession is slightly better than defaulting on a loan for your credit score.

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Purchase Your Lease (for Leased Cars)

If your car is currently leased, you can purchase the lease to get out of your car loan payments. Before pursuing this option, check with your lessor if the contract supports a buyout. Not every lessor lets you purchase the lease, and most will charge fees for an early buyout.

A lease buyout lets you keep the current car and free yourself from debt. A lease purchase program gets you out of the auto debt cycle. No longer owing lease payments gives you more flexibility for your budget.

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