How to Get Out of a Car Loan

Austin KilhamUpdated December 14, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you bought and financed a vehicle, you have monthly car loan payments that you really need to keep up with. But what happens to your loan if you decide you no longer want the car or you just can’t afford your auto bill? Luckily there are a few options when you’re trying to figure out how to get out of a car loan, from selling your car to refinancing. Here’s a look at each and the factors to consider before deciding how to get out of your car loan.

How Do Car Loans Work?

Buying a new or used car is likely one of the biggest purchases you’ll make. The average cost of a new car in 2022 is $48,000, according to Kelley Blue Book. So it’s no surprise that many car buyers need to finance their purchase with an auto loan. When you take out an auto loan, you borrow money from a lender to cover the price of the vehicle you wish to purchase. Car loans are secured and use your vehicle as collateral. As the borrower, you agree to repay that money over time in regular installments. You also agree to make interest payments, which is one of the main ways that lenders make money. And you may be on the hook for various fees associated with the loan. You agree to make payments for a set period of time, known as the loan term. Terms can be anywhere from 12 to 84 months, though on average they are about 72 months for new cars and 65 months for used ones. The shorter the term, the higher your monthly payments will likely be, but the less you’ll pay interest. The longer the term, the lower your monthly payments will be. However, because interest payments are drawn out over a longer period, these loans may be more expensive ultimately. What’s more, lenders tend to see loans with longer terms as riskier, so to offset some of that risk, they may charge higher interest rates than they would with shorter loans. Auto loans tend to be offered most frequently through banks, credit unions, car manufacturers, and dealerships. To apply and qualify for a loan, the lender will typically look at your credit score as well as employment and income details to help assess your creditworthiness and the risk they take by extending credit. In general, borrowers with strong credit scores (670 and up is considered “good”) and stable incomes will be offered good interest rates and terms. Dealerships tend to have similar requirements to banks when extending credit. However, there are certain situations in which a dealer loan may be advantageous. Dealers want to sell cars. If they need to make a sales quota, for instance, they may be inclined to offer lower interest rates or other deals, such as 0% financing, to entice buyers into a sale. Recommended: 10 Types of Car Loans

Can You Get Out of a Car Loan?

If, for some reason, you find that your auto loan is no longer working for you — perhaps you don’t need the car anymore, or you can’t afford the payments — then it is possible to get out of your car loan.

5 Ways to Get Out of a Car Loan

Here’s a look at some of the options to see your way to getting out of car loan.

1. Selling Your Car

You can sell your car while you’re still making payments. Before you do, find out what the payoff amount is, the amount you still owe before you own your vehicle outright. Ideally, this is the amount you’d garner from a sale. However, you’ll need to find out what your car is actually worth, which you can do using online resources such as Kelley Blue Book. Subtract the amount you still owe from the car’s value. If the resulting figure is negative, you owe more on your loan than the car is worth. In other words, you have an “upside down loan” on your hands, and you have negative equity in the vehicle. Buyers will pay your lender. And if you have negative equity, you’ll be required to make up the difference to ensure you repay your loan in full.

2. Trading in Your Car

If your problem is that you’re having trouble affording your monthly payments, you may consider trading in your car to a dealer toward the purchase of another cheaper car. Weigh this option carefully, however, since dealer trade-ins usually offer less money than you’d get through a private sale.

3. Refinancing Your Loan

There are other ways to help you afford your monthly payments. You may want to consider refinancing your loan. When you refinance, you pay off your old auto loan with a new one, ideally one with a lower interest rate or more affordable monthly payments. One way to make your monthly payments more affordable is by extending the loan term. But beware, this can make the loan more expensive in the long run. You may want to consider refinancing if interest rates have dropped or your credit score has improved, helping you qualify for a loan with a lower rate. Note: This option may not be worth it if the fees you’ll owe on your new loan outweigh the savings from refinancing. Recommended: Pros and Cons of Refinancing Your Car

4. Renegotiate With Your Lender

If you’re struggling with your auto loan payments, consider reaching out to your lender to renegotiate your car loan. Talk to them about your situation, and see what solutions they may have to offer. For example, if you are in some sort of financial distress and afraid of missing payments, your lender may be able to offer you forbearance on your loan, which puts payments on pause for a period. Your lender might offer to extend your term without refinancing, or they might be able to modify your monthly payment to make it more manageable. Recommended: 7 Tips for Lowering Your Car Payment

5. Voluntarily Surrendering Your Car

This option is available to you if you’ve already defaulted on your loan and your lender is going to repossess your car. Voluntary repossession gives you more flexibility in how you return your car to your lender.

Does Getting Out of a Car Loan Affect Your Credit?

Getting out of a car loan can hurt your credit. Pay off your loan through the sale of your car, and you may reduce your credit mix, one of the key components of your FICO® credit score. Seeking new credit, by refinancing your loan, for example, can also cause a dip in your credit score. Lenders worry that borrowers with new credit may be more likely to default on their loans. However, your payment history is the biggest component of your credit score, so the thing that will hurt your credit most is missing payments, going into default, or having your car repossessed. Do what you can to avoid these possibilities, including refinancing, renegotiating, or selling your vehicle.

The Takeaway

How to get out of a car loan? If you no longer wish to have a loan for your automobile, there are certainly options to getting out of a car loan. Paying off the loan, whether with cash on hand or by selling your car and using the proceeds to do so, is the best way to clear your debt. Otherwise, if it is a question of finding a more affordable monthly payment, renegotiating, or refinancing.

3 Auto Loan Refi Tips

Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right auto refi loan for you.
Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
Generally, the newer your car, the lower the refi interest rate. This is because younger cars typically have a higher value than old or used cars — and the car serves as collateral for the loan.

Frequently Asked Questions

Will Returning a Car Hurt My Credit?

Can I Sell My Car If I Still Owe Money on It?

Can I Sell My Car Back to the Dealership?

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About the Author

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.

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