Short Answer
If you want to get out of a car loan, the main options are to sell the car and pay off the loan, refinance it, trade in the vehicle, or work directly with the lender on a payment arrangement. If you simply stop making payments, the lender may repossess the car, and you could still owe money afterward.
1. Sell the Car and Pay Off the Loan
For many borrowers, selling the vehicle is the most straightforward way to end the loan.
First, ask your lender for the current payoff amount. Then compare that amount with the car’s current market or private-sale value.
For example:
- Loan payoff: $18,000
- Car’s selling price: $20,000
- Difference: $2,000
If you can sell the car for enough to cover the payoff amount, the sale proceeds can be used to pay the lender and close the loan. The CFPB recommends checking both the payoff amount and the vehicle’s value before selling.
2. Sell the Car if You Owe More Than It Is Worth
You may have negative equity if your loan balance is $20,000 but the vehicle is worth only $15,000.
In that situation, selling the car would leave a $5,000 shortfall that still needs to be paid.
Possible ways to handle the difference include paying the shortfall yourself or discussing options with your lender. Simply selling the car does not automatically eliminate the remaining debt.
3. Refinance the Car Loan
If your main problem is an unaffordable monthly payment, refinancing may help.
A new lender may offer a lower interest rate or a longer repayment term. A longer term can reduce the monthly payment, but it can also increase the total interest paid over the life of the loan.
Refinancing does not make the debt disappear. It replaces the existing loan with new financing.
4. Trade In the Car
You can also trade in a financed vehicle.
Before doing this, find out:
- Your current loan payoff amount
- The vehicle’s trade-in value
- Whether you have positive or negative equity
- How the existing loan will be paid off
Be careful when a dealer offers to roll negative equity into your next car loan. This can increase the amount you borrow and the total interest you pay.
5. Ask Your Lender for Payment Relief
If you’re struggling because of a temporary financial problem, contact your lender before missing payments.
Depending on the lender and your circumstances, options may include changing your payment date, temporarily postponing payments, or creating a different payment arrangement. Get any agreement in writing and ask how it could affect your credit report.
6. Voluntary Repossession
If you cannot keep the vehicle and other options don’t work, you may be able to voluntarily surrender it to the lender.
However, voluntary repossession does not necessarily eliminate the loan balance.
The lender can sell the vehicle, and if the sale proceeds are less than the amount you owe plus permitted costs, you may still be responsible for the deficiency. A voluntary repossession can also negatively affect your credit.
7. Avoid Simply Stopping Payments
Stopping payments without communicating with your lender is generally one of the riskiest ways to handle an unaffordable car loan.
Depending on state law and your contract, the lender may repossess the vehicle. After selling it, you could still owe a deficiency balance, along with certain repossession-related costs.
The FTC recommends contacting your lender as soon as you know you are having trouble making payments rather than waiting for repossession.
What Is the Best Way to Get Out of a Car Loan?
It depends on your situation.
If the car is worth more than the loan balance, selling it and paying off the loan can potentially end the debt without repossession.
If the car is affordable but the interest rate or payment is too high, refinancing may be an option.
If the vehicle is worth less than what you owe, calculate the negative equity before deciding whether to sell or trade it.
If you’re temporarily struggling with payments, contacting the lender early may give you more options.
The key point is that getting rid of the car and getting rid of the debt are not always the same thing. Make sure you know the exact payoff amount and how any remaining balance will be handled before transferring or surrendering the vehicle.