How to Get Out of an Auto Loan You Can’t Afford

Can You Get Out of a Car Loan?

It may be possible to get out of a car loan, but the options available to you depend on factors including your loan balance, the car's current value, your payment history and your lender's policies.

If you're having trouble making your car payments, you may be able to modify the loan, replace it with a new one or sell the car, among other options. Understanding where you stand financially can help you identify which alternatives may work best for your situation.

Reasons to Consider Getting Out of a Car Loan

You might consider trying to get out of an auto loan if:

• You misjudged your ability to pay the loan. Perhaps the payment looked reasonable when you signed the loan contract, but as time has gone by, it's become clear that the loan is putting a strain on your budget.
• You're experiencing financial hardship. An unexpected event like job loss, serious illness or divorce can drastically affect your income, making your car payment unmanageable.
• Your other expenses have increased. Rising expenses for essentials like rent, food or utilities could put a previously affordable car payment out of reach. If you're having trouble affording necessities, getting out of your car loan could give you some financial wiggle room.
• Interest rates have decreased since you took out the loan. If interest rates are lower than when you financed the car, refinancing the loan could reduce your high monthly payment.

Learn more: What Happens to My Car Loan if Interest Rates Drop?

How to Get Out of a Car Loan

Here are some possible options if you have a car loan that you can't afford.

1. Negotiate With Your Lender

If you want to keep your car, contact your lender to explain your situation and see if you can work out an agreement. For example, if you expect your financial challenges to be temporary, you might be able to negotiate a forbearance, which pauses your payments for a short period. Your lender may also offer to modify your monthly payment amount to make payments more affordable until you recover financially.

Learn more: How to Negotiate a Car Loan

2. Refinance Your Auto Loan

Refinancing your car loan involves replacing your current loan with a new one, usually with a different lender. If interest rates have dropped or your credit score has improved since you bought your car, you may be able to qualify for a lower interest rate, which could mean a lower monthly payment.

You may also be able to reduce your monthly payment by refinancing into a loan with a longer repayment term. However, be sure to consider how the total interest you'll pay on a longer new loan compares to the total interest on your current loan. You can use Experian's car payment calculator to figure this out. Also check your current loan agreement to see if there's a prepayment penalty, which could add to the potential costs of refinancing.

Tip: Taking time to shop around for the best auto loan interest rate before you apply for refinancing will help you maximize savings on your car payments.

Learn more: Should I Refinance My Car?

3. Sell the Car

Getting rid of your car isn't ideal, but if you can't repay your loan, you may lose the vehicle anyway. Selling it puts you in control of the process, avoids repossession and could net you enough cash to make a down payment on a more affordable car.

Another option: Visit a dealership and see if you can trade in your car toward part of the purchase price for a less expensive vehicle. Just keep in mind that you'll usually get less money with a trade-in than by selling your car to a private party.

Tip: Some lenders allow you to transfer your auto loan to another borrower, either directly with the same interest rate and terms or by having the other person apply for a new loan. The transfer process can be complicated and many lenders don't allow it, but if someone is interested in buying your car, it could be worth investigating.

Learn more: How to Sell a Car With a Loan

4. Voluntarily Surrender the Car

If you default on your auto loan, the lender can repossess the car. Repossession isn't a pleasant process, and it can do serious harm to your credit score. If you're hoping to avoid repossession and don't have any other options, you can voluntarily surrender the vehicle to your lender.

A voluntary surrender (sometimes called voluntary repossession) lets you return the car to the lender on your terms. Although both repossession and voluntary surrender negatively impact your credit score, lenders may look more favorably on a voluntary surrender because it demonstrates you were cooperating with the lender. A voluntary surrender also avoids some repossession-related costs.

Learn more: How Will a Voluntary Surrender Impact My Credit Score?

How Will Getting Out of a Car Loan Affect My Credit?

How getting out of a car loan may affect your credit depends on which option you choose.

Options With a Minimal Impact

• Selling the car: Selling your vehicle and using the proceeds to pay off your auto loan can cause a temporary drop in your credit score. Replacing your loan with a new one on a cheaper car could also lower your credit score slightly because it involves a hard credit inquiry. In both cases, however, there's typically no long-term damage to your credit.
• Negotiating with your lender: The outcome of negotiations may or may not affect your credit score depending on what you and the lender agree to. If you switch to a longer-term modified repayment plan, for example, the lender may report that you're not making payments as originally agreed. This could negatively affect your credit score and how future lenders view you.

Options With a Larger Impact

• Refinancing your auto loan: Like replacing your current car with a new one, refinancing your car loan will affect your credit when you apply for the loan and when the new account is opened. Credit inquiries typically won't impact your credit score much, but adding a new account could affect your average age of accounts, which is a factor in your credit score. Still, if refinancing enables you to make your loan payments on time, the benefits will likely outweigh any downsides.
• Voluntarily surrendering the vehicle: If you're considering a voluntary surrender, you've probably already missed some payments, which can significantly lower your credit score. Your lender may also have threatened repossession. A voluntary surrender may look better than repossession to lenders checking your credit report in the future, but it still has a major negative impact on your credit score.

Learn more: How to Refinance a Car Loan With Bad Credit

How to Avoid Going Upside Down on a Car Loan

Being upside down on a car loan, sometimes called having negative equity or being underwater, means that you owe more on your loan than the vehicle is worth.

Selling the car, refinancing the loan or voluntarily surrendering the vehicle can be more complicated if you're upside down on your loan. You may need to pay the lender the deficiency balance—that is, the difference between the outstanding loan amount and the vehicle's value. This can be difficult to do if you're already struggling with your payments.

If you're already underwater on your auto loan, there may not be much you can do about it. But there are a few ways to avoid it.

• Make a large down payment. Cars depreciate over time, and new cars generally depreciate especially rapidly during the first year. Making a down payment of at least 10% for a used car and 20% for a new car can reduce your chances of ending up with negative equity.
• Choose a shorter repayment term. Opting for a longer auto loan term can make your monthly payments more affordable, but it also means you're paying down the loan more slowly. Even if you made a down payment, the longer loan term could make it easier for depreciation to outpace your repayment.
• Trade in the vehicle. Trading in a car with negative equity isn't an ideal solution, but it can be a better option than repossession or voluntary surrender. The dealer may be able to roll the deficiency balance into your new loan instead of having you pay it to the original lender. However, this means you'll likely be upside down on the new car immediately. Depending on the amount of the deficiency balance, you might also exceed lenders' loan-to-value limits, which are typically capped at about 120% to 125% of the value of the car you're buying. This could make it harder to qualify for a loan.

Learn more: How to Get Out of an Upside-Down Car Loan

Frequently Asked Questions

Understand the Impact of Your Decision on Your Credit Score

If you can't afford your car payments, your current situation is likely to be your biggest concern. But as you evaluate your options for getting out of your auto loan, make sure you understand their potential effect on your credit and how you can minimize any negative impact.

You can monitor your credit for free with Experian to understand how your actions impact your credit and take action when needed to avoid significant damage to your score.