If you can’t pay back your car loan, you can try negotiating with your lender, refinancing your loan, selling the car, or giving it up voluntarily to keep it from being repossessed.
For many people, a car provides necessary transportation for work, school or other everyday needs. But with an average auto loan balance of $23,792, owning a car can be expensive.
If youre struggling to keep up with your payments, you may consider selling the vehicle, working with your current lender, refinancing your car loan or voluntarily surrendering the car to your lender. Before you decide which path to choose, understand how each works and how it can affect your finances as well as your credit. Heres more on how to get out of a car loan that you cant afford.
Let’s face it: getting rid of a car you can’t afford can be stressful. The car may be your main form of transportation or even an important part of who you are. But if keeping it is hurting your finances, you need to make a change. The good news is that you can get rid of your car without hurting your credit score if you plan ahead.
Assess Your Situation
First take an honest look at your financial standing. Calculate how much you still owe on the auto loan and how much your vehicle is currently worth. Sites like Kelley Blue Book can provide estimates based on your car’s make, model year, mileage, and condition.
Compare the loan payoff amount to the car’s value. Selling your car might help if it’s worth the same or more than what you owe on it. You will need to come up with a way to cover the difference if you sell if you don’t.
Also consider your long-term budget. Could you make changes to other areas of your budget to make room for the car payment? Look at non-essential costs that could be cut temporarily.
Protect Your Credit
Since a car loan is an installment loan, payments made on time are reported to the credit bureaus, and payments made late will hurt your score. If you are having a hard time, talk to your lender right away about what you can do to keep your credit score from going down.
You may be able to get forbearance to temporarily pause or reduce payments. This prevents delinquencies while giving you time to get back on your feet. Lenders may also modify loan terms to make it more affordable.
If you must get rid of the vehicle, opt for strategies that allow you to satisfy the loan terms without simply defaulting. Work with your lender to find the best resolution.
Weigh Your Options
Selling the car is often the best option if it will cover your remaining loan balance. Use sale proceeds to pay off the lender and get the title transferred to the buyer. If you owe more than it’s worth, have savings to cover the difference.
Trading it in when buying another vehicle also pays off the old loan. But negative equity gets rolled into the new loan, so monthly payments will be higher.
Refinancing could lower monthly payments if you get a better interest rate or extend the repayment period. But refinancing too often adds cost over the long-term.
Voluntary repossession surrenders the vehicle instead of making payments. But it can still harm credit, and you may owe deficiencies. Talk to your lender first.
Defaulting should be a last resort. It damages your credit significantly and leads to forced repossession and potential deficiencies.
Alternative Transportation Solutions
If you can no longer afford car ownership, look into cheaper transportation alternatives. Public transit, carpooling, biking, and walking may work if available and practical.
You can also transition to car rentals or car sharing platforms as-needed instead of having a vehicle full-time. Compare rates against your previous monthly expenses.
Ride share services like Uber or Lyft work in many urban areas. Again, compare costs for your typical monthly travel needs.
Rebuild Your Credit
If you had to surrender your vehicle or default on the loan, don’t panic. The damage won’t last forever. Focus on rebuilding credit.
Make all other loan and credit card payments on time. Keep credit card balances low. An overall solid payment history helps offset negatives.
Avoid new loan applications until your score recovers. Too many hard inquiries and new accounts can worsen the situation. Wait at least a few months.
Use secured cards if you need credit access. They require a refundable deposit and report to bureaus like regular cards.
With diligence, your credit can fully recover. Be patient, make smart choices, and get guidance from credit counseling agencies if you need extra support.
Summary
Getting rid of a car without damaging your credit requires carefully evaluating your situation, understanding all options, and choosing the resolution that best balances your transportation needs and financial realities. With the right approach, you can take control and minimize lasting credit impacts as you transition to affordable alternatives. Don’t make rushed decisions. Seek assistance if needed. And focus on rebuilding credit once you have a workable plan to move forward.
Refinance Your Auto Loan
Refinancing your car loan involves replacing your current loan with a new one. Depending on your situation, you may be able to qualify for a lower interest rate or a longer repayment term on the new loan, both of which can help lower your monthly payment.
But while a lower monthly payment is the primary objective, also consider how much more youll pay in interest over the life of the new loan compared to your current loan. Also, check for a prepayment penalty on your current loan to understand all the potential costs.
Before you apply for refinancing, youll want to shop around for the best interest rate to ensure the biggest savings in your finance payments.
Can You Get Out of a Car Loan?
It may be possible to get out of a car loan, but your options will depend on the specifics of your situation and your lenders policies.
During the financing process, its crucial to ensure that a new car payment fits in your budget without requiring you to sacrifice other financial goals or necessities. But if your circumstances have changed or you misjudged your ability to pay your loan, there are some steps you can take to get rid of the car payment.
Can I Get Out Of A Car Loan Without Ruining My Credit?
FAQ
Can I surrender my car without hurting my credit?
Quick Answer. A voluntary surrender means turning your vehicle over to the lender because you’re unable to make your auto loan payments—and it will hurt your credit. However, voluntary surrenders may not look as bad on a credit report as a repossession.
How can I get rid of my car without damaging my credit?
You can get out of your loan and keep your credit score from going down by selling your car, but only if you can sell it for the remaining amount of the loan.
Is there a way to get out of a car loan without ruining credit?
It is possible to get out of a car loan without damaging your credit, but you need to plan ahead and may need to work with your lender.
Can you get rid of a car if you financed it?
Yes, you can and it will be listed in your credit report as a repossession. The bank will try to sell it but if it is sold for less than the balance owed, you are responsible for the remaining balance.