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6 ways to get out of a bad car loan
What to do if you can't afford repayments or just got a raw deal.
1. Refinance your loan
Refinancing your car loan involves taking out a completely new loan with a different lender to pay off your current car loan. You get different rates and terms, and it’s an opportunity to change companies if you’re unhappy with your current lender.
You can benefit the most from refinancing if your credit, income or other aspects of your personal finances have improved since you first took out your car loan. But even if it’s stayed the same, compare refinancing offers to see if you qualify for something better.
However, if your credit score has gone down or your finances aren’t in great shape, refinancing might not be the best decision.
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2. Trade in your car for a less expensive one
When refinancing is off the table, you can often downgrade to a less-expensive, used car by bringing it in to a dealership. You won’t fully get rid of your car loan, but you could reduce your balance.
Read the contract carefully before you sign it, though. Some dealerships will try to move your current balance into a loan with a longer term. This gives you lower monthly repayments, but you could actually end up paying more in the long run if your rate stays the same.
3. Sell your car to a private party
Selling your car to a private party and using the profits to pay off the loan is another way to get out of a bad car loan. This can be a bit more complicated when your car still has a lien on it, so just be up front with the buyer about the process.
Before you sell your car, research how much it’s worth and ask your lender about your loan payoff amount — it’s slightly higher than your balance since it takes into account unpaid interest. You can get a ballpark idea of your car’s value online through sites like Kelley Blue Book or Edmunds. Consider having it appraised by a professional before you actually sell it. If your car’s value is less than your payoff amount, this option might not be the best choice for you.
4. Move your debt to a balance transfer credit card
If you’re struggling with monthly repayments or paying off a loan with an APR higher than 36%, you might save by moving it to a balance transfer credit card. This option might not be the best if you have bad credit or low income, though. You could have difficulty qualifying for a credit card with a high enough limit or favorable rates.
Even if the credit card comes with a higher rate than your current car loan, you may be able to take advantage of a 0% APR promotional period — sometimes as long as 18 months. You’ll be responsible for minimum monthly repayments, giving you the flexibility to make your repayments fit your budget.
Quick tip: Don’t just pay the minimum
If you choose this method, commit to making fixed repayments each month that you can afford to. Only making the minimum monthly repayment can quickly land you with an unmanageable pile of debt when interest kicks in.
5. Negotiate with your lender
When you can’t qualify for refinancing and would rather keep your car, talking to your lender might be the best next step. Call your lender and explain what it is about your car loan that you’d like to change.
If your credit or income has improved, be prepared to provide proof — they might be willing to give you a better rate or more favorable terms. If you’re consistently struggling with repayments, consider asking for a longer term.
Facing a short-term financial setback like temporary unemployment? You could pause your car loan repayments for a few months. However, only use this option as a last resort — all of the added interest while you aren’t making repayments typically gets added to the loan balance, meaning you’ll be paying interest on interest.
6. Give the car to your lender
As a last resort, you can voluntarily bring your car to your lender if repayments have become impossible to afford. Bringing it in rather than waiting for your lender to arrange for repossession often gives you more room to negotiate and take control of the situation. It also helps you save on the cost of repossession, which the lender often passes on to the borrower.
If your car’s value has depreciated enough that it’s not worth the value of your loan, you could end up having to pay a small amount — though it’s still less than what you’d have paid if you stuck with the loan. If it can sell the car for more, ask the lender to give you the difference.
Can I get out of an upside-down car loan?
You can get out of an upside-down car loan, though your options are typically limited. If your car’s value is worth less than your loan, assess how much your car loan is upside down before reaching out to your lender. They might be willing to renegotiate your loan to get you above water.
Otherwise, you can consider one of the options mentioned above. If you don’t think any of these are the right choice for you, consider making extra repayments. This will help you get you out of debt faster and save on interest — though you’ll still be stuck paying more than your car’s worth.
How to avoid getting a bad car loan next time
They say hindsight’s 20/20 — here are a few tips to avoid getting a bad car loan your next time around:
- Shop around. Don’t just go with the dealership financing. Compare offers from multiple lenders to make sure you’re getting the best deal available to you.
- Pay attention to the loan term. A longer term gives you lower monthly repayments but costs more in interest. Opt for the shortest term with repayments you can comfortably afford each month. You can use our car loan monthly payment calculator to help you figure this out.
- Make a down payment. Making a down payment of at least 20% reduces the cost of your loan and can also help ensure you’re getting a car you can afford.
- Read customer reviews. Borrower reviews on websites like the Better Business Bureau and Trustpilot can help you avoid a shady lender if you notice a pattern of red-flag complaints.
It’s possible to get out of a bad car loan — even if it’s upside down. If you find yourself behind on repayments, reach out to your lender as soon as possible to discuss your options. You can learn more car loan basics by reading our guide to auto loans.
Frequently asked questions
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