How to Get Out of a Car Loan

By Eric Rosenberg
Reviewed by: Lauren Bringle, AFC®
Published on: 08/06/2020

While many Americans need a car or other vehicle to get to work and handle other personal needs, cars can be very expensive. If you own a car with a loan, those monthly payments may be a big drag on your personal finances.

For anyone struggling to keep up with a car loan, you might we wondering how to get out of a car loan.

It isn’t always a simple process, but here are your options if you want to get out of a car loan for any reason.

Good option: Pay off the car loan to free up monthly cash

Your best option to get out of a car loan is to pay off the remaining balance.

If you’re struggling with payments, however, this is easier said than done. But if you can come up with the cash to pay off the loan, you won’t have to make any future payments.

Paying off the loan may also benefit your credit, as it shows lenders that you are a responsible borrower.

When you pay off a car loan, the lender should send you a letter confirming that the debt has been fully paid. You should also get the title to your vehicle, as you own the car outright once your loan is paid off.

Fair option: Sell the car and pay off the loan with proceeds

If you don’t see any way to keep up with your car payments, it could be a good time to sell the vehicle and buy something that is a better fit for your budget. When you sell the car, you can use the proceeds to pay off the remaining loan balance.

If you’ve never sold a car, the best way to sell for the highest value is a private sale to another individual.

Selling a car to a dealership or car lot is easier but may lead to a lower sale price. When selling to an individual, make sure to get paid with a cashier check or similar to ensure you don’t lose out due to fraud.

Some auto loans may be “underwater,” which means you owe more on the loan than the car is worth (A.K.A. you have negative equity). This is most common when buying expensive new cars, as the value goes down quickly.

If you sell a car with a loan that’s underwater, you’re still going to have to pay the difference to pay off the loan.

Learn more about what it means to have an upside down car loan HERE.

Fair option: Refinance your current loan with a new one

You probably didn’t sign up for your car loan expecting trouble, but if you do find yourself behind on payments and still want to keep the car and keep paying for it, you may be able to refinance with a new auto loan.

When you refinance, you pay off the old loan with the proceeds of a new loan. If your credit has improved since you first bought the car, you might find a better deal when you refinance.

But if your credit is the same or worse, you could end up paying a higher interest rate.

Spreading out the loan over a longer period of time lowers the monthly payments but leads to higher total costs over time. For some people, a longer loan could be worth it. But for most, it’s best to pay off the vehicle as quickly as you can afford.

Just shop around for the best financing options and finance company for you and make sure the new car loan would be a better deal than the original loan so it can actually save you money.


If you refinance the loan for a lower interest rate and a better loan term, and you have GAP insurance, you could be entitled to a partial refund for GAP insurance you didn't use. This could also help put a little money back in your pocket if you need it.

Mediocre option: Voluntary repossession

If you can’t keep up with the cost of the car loan and can live without it, you have the option to give the vehicle back to the lender with a voluntary repossession.

Unlike having the repo man show up and take the car, this is a proactive approach to getting out of an underwater vehicle loan.

However, just because it’s voluntary doesn’t mean it’s good for your credit. A voluntary repossession is considered a type of default. This is a negative event that will stay on your credit report and influence your credit score for up to seven years.

But it could make sense is some cases as it stops your loan payments right away. Voluntary repossessions are generally noted as such on your credit, which looks better to lenders than a regular loan default.

Bad option: Default on the loan

The worst thing you can do when you’re under strain from any loan is to ignore it. If you just stop making your monthly car payment or underpay, you will go into default. That could ruin your credit for the better part of a decade while potentially leading to a repossession.

Defaulting and losing the vehicle is the worst-case scenario for an auto loan. Few people would ever choose this route. It’s usually decided for borrowers who don’t keep up with their loan obligations.

If you are worried about defaulting, the best thing to do is call up your lender to discuss your financial situation. They may be willing to work with you to create a payment plan or find another solution that allows you to keep your car.

Lenders typically don’t want you to default. They would rather help you find a way to catch up on your payments. If they can help make it happen, they might be willing to do so.

Last resort: Bankruptcy

The worst thing that can happen to your credit is bankruptcy. A bankruptcy shows up on your credit report and seriously damages your credit score for up to 10 years.

That’s a long time to wait for your credit to recover.

It could prevent you from buying a home, too.

However, in some cases, a bankruptcy judge might grant you some relief for your car loan. That could come in the form of a lower balance or lower monthly payment. But that’s far from guaranteed and a big risk. Even with bankruptcy, you could still lose the car.

Bankruptcy is rarely the best option. However, in some rare situations, bankruptcy could get you out of a car loan and put you on a path to a stronger financial future.

Just beware of the costs and risks before getting started.

Do your best to keep transportation costs under control

When I bought my car, I purchased a reasonably priced and reliable Toyota Carolla.

I paid it off in about two and a half years and have kept the same car with no loan for more than a decade since. My car isn’t flashy or fancy and has over 100,000 miles on it, but I have not made a car payment in a very long time because of it.

While nearly anyone would prefer a fancy, new car, it’s not always the best financial decision.

Stick to a budget and consider a used car as a way to save big on your loan amount and other transportation costs. Cars are only worth less and less over time in most cases, so they are generally one of the worst places to spend extra money.

There are many ways to get around. If you can keep your transportation costs low, your finances will benefit for years to come.


  1. Credit Karma. "How to get out of a car loan when you’re upside down".

  2. Experian. "How to Get Out of a Car Loan You Can’t Afford".

  3."What Is An Upside Down Car Loan?".

About the author

Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. See Eric on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin or Twitter.

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Written on August 6, 2020
Self is a venture-backed startup that helps people build credit and savings.

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