Can I Get Out of a Car Loan Without Ruining My Credit?

Dear DGS,

You may be able to get out of your car loan without hurting your credit, but only if the debt is ultimately paid as agreed. This means getting creative with options that don't require asking the lender to come pick up your vehicle in exchange for wiping out the debt.

For starters, you'll want to determine how much equity you have in your vehicle. To calculate equity, subtract the amount you owe on your auto loan from your vehicle's estimated value. If you owe more than the car is worth, you have negative equity that will need to be resolved.

Will Car Loan Debt Settlement Affect My Credit Score?

You mentioned paying a settlement balance instead of the full amount owed on your loan. When a lender offers a settlement, they are agreeing to take a loss on the remaining debt in order to close out the account. While paying a settled debt is better than defaulting, a settled account is still considered negative because it means you did not pay the lender the full amount you originally agreed to.

Settled accounts remain on a credit report for up to seven years. If you are current on your loan but then settle the debt rather than pay in full, the seven-year period will start from the date of settlement, so you'll want to give this option careful consideration. Sometimes a settlement is the best course of action. If you've exhausted all other options, most future lenders will view settling the debt as better than not paying the remaining balance at all.

Will a Voluntary Surrender Affect My Credit Score?

Voluntarily surrendering your vehicle will have a substantially negative impact on your credit scores because it means that you did not fulfill the original loan agreement. When you voluntarily surrender your vehicle, the lender will sell the car to recover as much of the money owed as possible. If the car is sold for less than the amount you owe on the loan, you will still be responsible for paying the remaining amount—the deficiency balance.

Although still negative, voluntary surrender may be slightly less damaging to your credit history than repossession because it indicates that you were willing to work with your lender to resolve your situation.

What to Do if You Can't Make Your Car Payments

If you are struggling to make payments on your car loan and want to avoid harming your credit rating with a voluntary surrender or repossession, you have options:

• Sell the vehicle. If your car is worth as much as or close to the balance on your account, selling it could enable you to pay off the loan without harming your credit. Even if the amount you sell it for doesn't cover the full amount of the loan, you may be able to refinance the remaining balance, making your payments smaller and much more manageable. A loan that shows "paid in full" is much better for credit scores than one that was closed following a voluntary surrender or repossession.
• Allow someone else to take over payments. If your lender allows, you may be able to transfer your loan to another individual who will take ownership of the vehicle and assume the loan payments. In most cases, the new owner will have to meet the lender's requirements to qualify for the loan. Keep in mind that it's always best to contact your lender to discuss your options before falling behind on payments with the expectation that you can simply transfer the loan.
  Alternatively, it may be tempting to allow someone else to make payments on your behalf in exchange for use of the vehicle without transferring the loan, but you should exercise caution. As long as the loan is in your name, any missed payments are your responsibility and will be reported to your credit history, even if you are not the one using the vehicle.
• Refinance the loan. If your current interest rate is high and your credit is good, you may be able to lower your payments enough to keep your car by refinancing your loan at a lower interest rate. Any time you apply for and open a new account, it's possible that you will see a slight dip in your credit scores, but it's likely this will be temporary. Once you begin making on-time payments on the new loan, you should see your scores rebound.

If you are trying to rebuild your credit after a voluntary surrender, the most important things you can do to improve your scores are to make all future payments on time and keep your credit card balances as low as possible. You can also try boosting your FICO^® Score^☉ right away by adding your positive utility, cellphone and streaming service payments to your Experian credit report with Experian Boost^®ø.

Thanks for asking,
Jennifer White, Consumer Education Specialist