The day you financed your new car, it probably felt like a great idea.
Do you remember the new car smell? That was probably part of what drew you in. That mixed with a savvy salesman and the alluring idea of years of maintenance-free driving.
Trust me, that euphoric ‘new car’ feeling wears off after a few months, and making a car payment becomes a chore. In 2008 I financed a brand new Ford Ranger; It took about 5 months before my truck was scratched up and I deeply regretted that decision.
Know the feeling? Keep reading, I’m going to show you that there are viable options for getting out from under a car loan, no matter how far you are into your agreement
Loan terms are getting ridiculous
Not so long ago, a five years was the longest term available on vehicle loans. Nowadays you can get 6, 7 and even 8-year auto loans.
The reason loan terms keep getting longer is that car buyers are focusing more on the monthly payment than the total price of the vehicle. Auto dealerships know this and that’s why they keep stretching out loan terms. People don’t care too much what the vehicle costs overall so long as they can afford the payments.
Dealerships are selling loans as much as they’re selling vehicles. Just listen to any dealership radio or television ad; they sell low payments, and low-interest.
Don’t fall for it.
That’s how they get people into car loans, they’re professionals. Now keep reading, I’m going to show you how to get out.
How to get out of a car loan
If you’re struggling under the financial burden of a car loan and you want out, you have a few options. How you go about offloading your expensive car payment is going to depend on your situation. Below are your options for getting out of a vehicle loan.
Pay it off
This is your best option if you’re not upside down on the vehicle, and the payments aren’t crippling you financially. Sit down and figure out how much you owe on the vehicle exactly and how much extra you can afford to pay each month.
To come up with even more cash, consider getting a second job, selling high-value items that you don’t need, work overtime, get a second job or set up a side hustle. If the debt is crippling you or would take an excessively long time to pay off (more than one year), you will want to consider the next option.
Sell the car
This is an option if the vehicle is worth more than you owe on it. Just sell the thing and be done with it. If the company that you’ve financed the vehicle with has a lien on the vehicle, you may not be able to sell it until the loan is paid in full and you have a ‘release of interest’ letter.
This can be a little tricky, I’ve done it by taking a cash advance from a low-interest credit card and then paying the vehicle off. Sell it, and then immediately pay back the credit card. You could also use saved cash or your emergency fund to do this although I’d be very cautious about the latter and would make sure that you’ve left amply money in the account for a real emergency.
Transfer your loan
This is the best option if you owe more money on your vehicle than it’s worth. Advertise the car for sale and make it conditional on the purchaser taking over the payments. This can be an appealing deal for the purchaser as they can get a nearly new car without the burden of a down payment, and at a reduced loan period.
The best part? You get to walk away. No more payments, no more new car. You can proudly go and buy yourself a debt-free beater and begin building your financial future.
A word of caution about this one: make sure that you get a release of interest letter from the financing company if somebody new has taken over your vehicle loan. I did this in 2009 and learned 5 years later during a credit check that Ford said I owed them $15,000. This was not true and I got it cleared up but it put my mortgage in jeopardy for a short time so I think it’s worth mentioning.
Defer payments or renegotiate your loan
Years ago I had a loan on a new vehicle and was laid off from work. I wasn’t able to make the payment one month, so I phoned the lender and asked them what I should do. They thanked me for phoning instead of just defaulting on the payment and deferred my payments for two months so I could get back on my feet. They also made it clear that they would do it again in the future if needed. It was actually pretty awesome customer service if you ask me.
You may also be able to refinance your current loan, especially if you have a sky-high interest rate.. If you can’t get a more favorable interest rate or longer term with the company that you’re with now, you might consider shopping around to see what you can get. If you have good credit, you’ll have options here. Consider a loan or even a low-interest line of credit.
I do not recommend that you do this unless the payments are breaking you financially and none of the other options will work for you. You can phone the lender and tell them that you can no longer afford the vehicle payments and are opting for a voluntary repossession.
This will damage your credit score and make it difficult for you to get credit in the future, at least on favorable terms. In addition, if the vehicle does not sell at auction for more than what was owed on it, you’ll likely be hounded by a collection agency for the balance. This is not an easy road and I do not recommend it if you have any other options at all.
The best way to protect yourself from ending up in this type of situation is to not finance vehicles. Nobody can repossess something that you own outright. That said, if you insist in financing your new vehicle purchase, I highly recommend that you read this article by money under 30 on auto financing. There are a lot of good tips in there that will save you money and hassle.
Have you ever had to get out of a car loan? How did you do it?
I’d love to hear your story in the comments!