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Whether you’re stuck in a car loan that you can no longer afford or you’re just unhappy with your currently financed vehicle, there are several ways to get out of the loan. For example, you can refinance the loan or sell the car and use the proceeds to pay off the loan.
Ultimately, the right option for you will depend on the value of your car, how much you owe, and whether you haven’t paid off the loan.
If you’re wondering how to get out of an auto loan, here’s what you need to know.
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How do auto loans work?
An auto loan is a type of loan secured by the vehicle. While this added security to the loan can lead to lower interest rates compared to unsecured loans, it also means you risk having your car repossessed by the lender in the event of a default.
Auto financing is usually available from banks, credit unions, and online lenders. In the first quarter of 2022, the average new car loan rate was 4.07%, while the average used car loan rate was 8.62%, according to Experian’s State report. of the Auto Finance Market. Repayment terms generally vary from 24 to 84 months.
Lenders often require down payments on auto loans. It’s generally a good idea to deposit at least 20% of the purchase price for a new car or at least 10% for a used car. For example, if you want to finance a new car for $20,000, you should have a down payment of at least $4,000.
If you are approved for a car loan, you will make monthly payments until the vehicle is paid off. These payments will go toward principal (the amount of money borrowed) and interest (the cost of borrowing the money).
Can you get out of a car loan?
Yes, it is possible to get out of a car loan. However, all of the options for doing so require repaying the loan in some way or agreeing to a voluntary repossession. Also, if you have financed a vehicle and are experiencing buyer’s remorse, you cannot simply return the car and go back on the loan agreement.
How to get out of a car loan
There are several ways to take out a car loan, although the strategy that’s right for you will depend on your personal circumstances and needs. Here are some potential options to consider:
Pay off the car loan sooner
If you have the cash on hand, simply paying off your car loan early might be the quickest way out. Plus, it will save you money on interest and could also help improve your credit score by reducing your outstanding debts.
Keep in mind that some lenders charge prepayment penalties if you pay off your loan early. Be sure to check your loan agreement or contact your lender to find out if you will end up with one of these charges.
Refinance the loan
Refinancing is the process of taking out a new loan with different terms and using it to pay off your existing loan. Depending on your credit, you may qualify for a lower interest rate, which could save you money on interest and potentially help you pay off your loan faster.
You can also choose to extend your repayment term if you need to reduce your monthly payments. Remember, this means you will pay more interest over the life of the loan.
Trade in the car
You may be able to trade in your vehicle at a dealership while buying another car, even if you still have a balance on your car loan. In this case, the dealership will work with you to pay off what you still owe on the loan by incorporating that amount into your total cost.
This can be one of the easiest and most direct ways to get out of an unwanted car loan. However, this is not always an option and could lead to a borrowing cycle.
Sell the car
If you want to get rid of both the car and the loan, consider selling the vehicle and using the proceeds to pay off what you still owe. This could be a good idea if you have accumulated equity in your car, as you may be able to sell it for more than you owe, leaving you with extra cash to invest in a new vehicle.
But if you’re under water on the loan, meaning you owe more than the value of the car, you may not earn enough from the sale to pay off the loan. In this case, you will still have to pay the remaining amount even if you no longer have the car.
Consent to voluntary takeover
If you can’t afford to pay and are unable to negotiate different terms with your lender, you may choose to return the car to the lender, a process known as voluntary repossession. In this situation, you will need to contact the lender to let them know you want to return the car, and then plan when and where to return it.
This can be much less stressful compared to involuntary repossession, which would involve a repossession agent sent by the lender to take your vehicle at an unknown time. For example, the officer could seize the car at your home or workplace, or even in a parking lot. Abandoning the vehicle voluntarily, on the other hand, means avoiding this agonizing chaos.
Also, while both voluntary and involuntary repossession will damage your credit score and remain on your credit report for at least seven years, there is a difference between the two on your credit report. If a lender looks at your credit report manually, they will see the repossession listed as voluntary, which might be viewed more favorably over an involuntary repossession.
Also keep in mind that if you return the car and the lender is unable to sell it enough to recover the remaining loan amount, you will have to pay the difference, which is called a deficit.
How to get out of a reverse car loan
If you owe more on your loan than the car is worth, your loan is considered upside down. This can happen if you invested very little in the vehicle when you first purchased it, or if the value of the vehicle drops quickly. Having an upside down loan can make it more difficult to sell or trade in your car as well as getting a new loan approved.
If you end up with an upside down loan, start by calculating the negative equity you have in your car. To do this, subtract the value of your car from the amount you still owe on your loan. For example, if you owe $20,000 on your loan and your car is only worth $15,000, you have $5,000 of negative equity.
Once you know how much negative equity you have, here are some options to consider:
- Turn negative equity into a new loan. If you plan to buy a new car, you may be able to incorporate your negative equity into the new loan. This means that the negative equity will be added to the price of the new car and you will finance it all together. For example, if you buy a new car for $30,000 and you have $5,000 of negative equity, you would finance the vehicle for a total of $35,000.
- Get a personal loan. If you’d rather not buy a new car right away, you can apply for a personal loan to cover your negative equity amount. This can be a useful option if you have a good credit score, usually a score of 670 or higher, and can benefit from a low interest rate.
- Save to repay negative equity. Depending on your financial situation, it may make more sense to save money to pay off your negative principal. It may take a while, but it will save you from paying interest over a longer period of time. Just make sure you continue to make minimum monthly payments on your loan.
What to do if you can’t afford your car payments
It’s important to make sure you can afford a car before financing one. But if your situation has changed and you are unable to repay your loan, contact your lender as soon as possible. Depending on your repayment history as well as your credit score, the lender might be willing to lower your interest rate, reduce your monthly payments, or otherwise change the terms of your loan.
Some lenders also offer assistance options for borrowers facing financial difficulties such as job loss. For example, you might be able to temporarily defer your payments or pay interest only.
Can you buy a car without a loan?
Yes, you can buy a car without auto credit. To do this, you will need to save the money to pay for the vehicle in cash. This can be difficult if you need a car fast or don’t have extra room in your budget to invest in a car fund, but keep in mind that buying a car without a loan also means you you’ll probably save hundreds or thousands. dollars on interest.
You can also consider another type of loan if you’d rather not get a car loan, such as an unsecured personal loan. However, since this type of loan is riskier for the lender without collateral, you will likely end up with a higher interest rate compared to what you would pay on a car loan.
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