If you need to get rid of a car payment, I feel you. As embarrassing as it is to admit, I’ve actually been through this twice… *facepalm*
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.
Next thing I knew I was on Google looking up ‘how to get rid of a car payment’…
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.
Upside down car loans
An upside down car loan is when you owe more on your vehicle than it is worth. You do not want to get yourself into this situation. Some ways that people find themselves in upside down situations include:
- Purchasing a new vehicle (it will lose enough value when you drive it off the lot that you will be upside down for as much as two years)
- Trading in a car that you still owe money on – This is a slimy tactic that dealers use to get you into a new car. Still owe money on the trade-in? No problem, they will just roll that into your new loan.
- Purchasing expensive insurance, protection or customization packages. These will not raise the value of the vehicle much (if at all) and will often result in an upside-down situation.
How to get out of a car loan (even if you’re upside down)
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 something 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 ample money in the account for a real emergency.
Before you sell your car, make sure you know how much it’s worth! There are a few good ways to check out the current market value of your vehicle.
- Check out what similar cars are listed for on Craigslist
- Look at the value on Kelley Blue Book
- Edmunds.com is another great place to check current value
How to sell a financed car without paying it off
This is possible, and I have done it. The only way to do this is to have the buyer take over the existing loan. If the car is worth more than what is owed on it, you can make a deal that includes them paying some cash to you as well.
This will only work if the buyer can qualify for the loan. If they can’t get credit through your lender, then it will not work.
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 a payment
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.
How to defer a car payment
Just call your lender and be honest with them. Up-front is always the best method. Your lender will be much more open to working with you if you’ve contacted them before you’ve defaulted on a payment. They want to get paid, and will lose money if the car is repossessed so they have some incentive to work with you.
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.
How to buy a cheap used car
Now that you’ve gotten rid of your vehicle and the payment that came with it, you’ll still need something to drive. I recommend scrounging up what cash you have and looking at your options. You should be able to get a decent, roadworthy car for $2000-2500. I wouldn’t recommend spending less than this unless you know how to properly inspect a used vehicle (or bring somebody who does), or if you’re buying from a trusted friend or family member.
Here are a few tips to help you find a good cheap used car to drive now that you don’t have a payment.
Choose a reliable model
If you’re on a tight budget, you’re best to buy a car that’s well known to be reliable. Picking a car that has a spotty reputation or one that hasn’t been produced for too long can be risky. Some good commuter vehicles with a good reputation for reliability are:
- Honda Civic
- Honda CRV
- Honda Accord
- Toyota Camry
- Toyota Corolla
Yes, I prefer imports but pretty much every reliability list agrees with me.
When I’m choosing a car I like to start at Carsurvey.org. Carsurvey is a consumer review site that has thousands of reviews for pretty much all makes and models, sorted by production year. If something is junk, this is a good place to find out about it.
Maintenance over mileage
All things being equal, I would buy an older or higher mileage car that’s been well maintained over a newer or lower mileage car that has no maintenance record.
The quality of a used vehicle has a lot to do with how the previous owner has cared for it. Many reputable used cars (think Civic, Accord, Camry and Corolla) are capable of more than 300,000 kilometers no problem if they’re properly maintained. If the previous owner doesn’t have any proof that the maintenance has been kept up to date, I’d definitely walk and look for something else.
Get a vehicle history report
It doesn’t cost much to pull a vehicle history report and honestly, it’s completely worth it. Most reports will tell you a lot about the history of a vehicle. In some cases, things that the current owner might not even know. You can learn:
- If the vehicle has been in an accident in the past
- Whether it has ever been a rental
- If it has been a taxi
- Vandalism and other non-collision claims
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 do finance 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.
Question for you:
Have you ever had to get rid of a car loan? How did you do it?
I’d love to hear your story in the comments!
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4 thoughts on “How To Get Rid Of A Car Payment (Even If You’re Upside Down)”
I financed a certified pre-owed BMW in 2004 (I was 22yr old) after my current car was stolen. This was my biggest financial burden while I owned it, $672.00 a month. I paid it down enough so I could sell it, then sold it to a private party. This was well before I started down my current FI path. I will never have another car payment again, pay cash only. If I could only have my current self slap my younger self I would.
Sounds like I’m a couple of years younger than you and I’m embarrassed to say I have financed 2 new cars in the last 12 years. No one thing has dragged me down more than those payments.
Great post NB, this is a topic close to my heart. 🙂 I once cut my losses and sold an expensive vehicle I’d sunk thousands into, but getting rid of that payment was such a weight off my shoulders. The experience led me to coming up with my own rule about car buying, which I shared in a recent blog post.
One note about selling a vehicle that has a lien. The key is to have the buyer make the cheque payable to you AND the bank holding the loan. That way, the funds have to be used to pay down the entirety of the loan, or the lien can’t be released. Most financial institutions will agree to write a letter confirming that lien will be released as soon as payment is applied, satisfying the buyer.
Thanks MMM, I read that post about keeping your car costs below $1500/year on your site and I have to say, it’s an awesome strategy that I hadn’t thought of before.
Regarding the lien – that’s a good tip. In the past I’ve used a line of credit to pay it off and get the letter releasing the lien prior to sale but that should work as well.