How to get out of a car loan or lease
A car loan or lease is a great way to get behind the wheel of a vehicle without breaking the bank. But if you find yourself in a situation where you can no longer pay your monthly payments, or are perhaps on the verge of becoming Upside down on your loan, there is a way out. Determine if refinancing your loan, paying off your loan, renegotiating, selling the vehicle, or even voluntary repossession is best for you.
5 options for getting out of a loan you can’t afford
You can get out of several doors if your loan no longer fits your budget. But you’ll need to tread carefully if you want to minimize the impact on your wallet and credit rating.
1. Refinance your loan
Refinancing your loan will help you save money month to month, long term or both.
- Obtaining a lower interest rate may reduce your monthly payment and the overall interest paid.
- Refinancing with a shorter repayment term can increase your monthly payments, but also decrease the overall interest paid.
- Getting a longer repayment term can lower your monthly payments, but also increase the overall interest paid.
This is especially a great option if your credit score has improved since you originally signed your loan agreement. A better credit score means you can probably benefit from lower interest rates and more favorable terms. But be on the lookout for the fees that come with refinancing your loan. A common penalty is a prepayment penalty, which is exactly what it sounds like – a charge to pay off the loan early.
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If this is the right option for you, take a look at Bankrate Winner 2022 for the best lender to refinance with.
2. Pay off the car loan
If you’re struggling to meet your monthly payments, the option to fully pay off your loan may be overkill. But if you have the financial backing to pay it off, you can walk away and get rid of the financial stress of even more potential debt.
One way to repay your loan is to pay a large lump sum. Before going this route, be sure to confirm with your lender the amount owed; it will most likely be a combination of your loan balance and your interest charges. Another – perhaps less daunting – option may be to increase your monthly payment slightly, so that payment occurs sooner.
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Avoid putting yourself in another precarious financial situation by having to dip into your retirement savings or other savings to pay off the vehicle.
3. Renegotiate the loan
Similar to refinancing your loan, you can contact your lender and negotiate a new payment plan. This is an especially good option if you have a good credit and payment history and only need temporary assistance to make up for lost time due to unforeseen circumstances.
It’s possible to give yourself a bit more time by deferring payments or even extending the term of your loan – but keep in mind that the longer the term, the more interest there will be overall. Before making an appointment with your lender, take a close look at your finances and estimate what type of monthly payment you can stick to for the remaining term of your loan.
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Negotiate a new repayment plan before you fall behind on your loan. If you wait until your payments are late, you may not have a vehicle to drive.
4. Sell the vehicle
Another strategy is to sell the car. Since you do not own the car, you must first obtain authorization from your lender. Contact the lender, let a representative know you are interested sell the car and find out about the transfer process and the documents, including the credit application that a potential new owner should complete.
You can also sell to a friend or family member if you are interested and the lender approves. But you are still responsible for any remaining balance on the auto loan.
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The closer the sale price of the car is to the amount you owe, the less money you will have left to repay.
5. Voluntary takeover
You should consider taking your car to your lender as an absolute last resort. To make this process more bearable, ask your lender if voluntary surrender of your car will release you from your loan obligation.
By handing over the car, you save your lender the cost and hassle of repossessing, so you may be able to get a more favorable final repayment amount. It may free you from certain final costs, including late or prepayment fees, or costs related to the resale of the vehicle. But going this route will mean a big hit to your credit score and could make car financing more difficult in the future.
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Even if you voluntarily give up the vehicle, the lender may expect you to return certain payments.
Get out of a lease
Costs terminate a lease early can be quite steep, so you should do everything you can to make your scheduled payments until the end of your term. But if you’re still having trouble making your payments, contact your leasing company and ask to review your terms. Be upfront about your financial situation and try to have an amount in mind that you can pay until the end of the lease.
Because you don’t own the car, you have far fewer options to cut short a bad lease. If you turn the car over to the leasing company early, you will be liable for additional payments. You may need to make any remaining lease payments even if you return the car. Some leasing companies charge early lease termination fees and disposal fees, in addition to all other standard end-of-lease fees, such as any excess mileage charges.
A final option is to transfer your lease to someone else, but that won’t be cheap or risk-free either. Online sites, such as Swapalease, LeaseTrader and LeaseQuit, help current tenants connect with drivers who want to take over their lease. Fees vary widely, so shop carefully.
The bottom line
It’s never too late to give up on a loan or lease if you can’t afford it anymore. Take the time to understand all your options and choose what is best for you based on your financial situation.