money

Stuck With a Bad Car Loan? Here’s How to Get Out of It

Michelle Black

WealthFit Contributor

Buying a car doesn’t always work out the way you planned. Many people have walked out of an auto dealership with more of an expensive vehicle than they intended to purchase. . .This might have happened to you.

What can you do if you find yourself with a bad auto loan or a monthly payment you can’t afford?  

Whether the new car smell is still fresh or even if you’ve been making loan payments for a few years, you might eventually find yourself wondering how to get out of your car loan. 

Here’s the good news: you have options. 

Here’s the bad news: Getting out of a bad car loan might not be easy. 

Read further to learn strategies for how to get out of your car loan, along with more insight about how credit affects the amount of interest you pay on a loan. 

Good Vs. Bad Car Loan

  • Can you afford the monthly payment? 
  • Is the interest rate on your auto loan too high? 

Evaluating whether you can afford your monthly car payment requires some digging and an honest look at your monthly budget

While knowing if you can afford the monthly payment is pretty straight forward, knowing if your interest rate is too high isn’t. 

So how can you tell? 

Good and Bad Interest Rates

According to Experian, below are the average interest rates you might expect to pay for an auto loan, based on your credit score range.

*Rates current as of the end of Quarter 2, 2019

Sometimes people get into bad car loans without understanding the impact a high APR can have on their finances. 

Your APR and the length of your loan ultimately decide the size of your monthly payment — however high or low that may be. 

Not only that, but a high APR could cost you thousands of extra dollars for the same vehicle. 

Here’s a quick illustration that shows how APR can affect the cost of your loan. 

For example, with a 20.99% APR (versus 4.77%), you’d pay:

  • $195 more per month
  • $11,667 in extra interest over the loan

How Your Interest Rate Is Decided

As you can see, your credit score is a huge factor in the price you pay for an auto loan. 

Are you likely to pay on time? Or are you likely to pay late, or worse, default? 

Lenders answer these questions by checking your credit score

Look at it this way. Let’s say you have a friend who asks to borrow $500. Your friend is responsible, trustworthy, and has a job. You believe he’ll pay you back as promised. So, you loan him the money. 

Lenders can’t make decisions this way. They don’t know you personally, so they can’t use a gut instinct to decide whether to loan you money. 

Instead, they rely on your credit to help fill in the blanks.

How Credit Scores Predict Risk

Credit scores are created for the following purpose: they analyze your credit report and predict the likelihood that you’ll pay any bill 90 days (or more) late within the next 24 months. 

If your credit score is low, it tells the lender that doing business with you is a greater risk.

When a lender checks your credit and thinks loaning money to you could be risky, they will charge you a higher interest rate to help make up for the risk it’s taking. 

If your credit is too damaged, your application for a loan will likely be denied.

How to Know If You Have a Bad Car Loan

Take a moment to put yourself in a lender’s shoes. It’s understandable that lenders may need to deny applications or charge more money if they’re less likely to get repaid as promised. 

If they didn’t, everyone would pay higher rates. 

You might not be willing to loan personal money to someone you aren’t sure would pay you back either. 

But sometimes, lines are crossed. Certain lenders might charge you more than is fair for your credit score. Auto dealers themselves might also mark up your interest rate, even if you qualify for a lower one, to try to make more money. 

Here are two signs that you may be stuck in a bad auto loan. 

  1. Your interest rate is higher than the average interest rate for your credit score range. 
  2. Your credit has improved since you took out the loan. 

Technically — in example #2 above — you might not be in a bad loan. 

Your lender may have offered you a fair rate when you applied for financing. 

But if your credit has improved since then, it may be a sign that you’ve outgrown the loan. 

4 Ways to Get Out of a Car Loan

If you’re wondering how to get out of a car loan, there are some legitimate ways to improve your situation. 

None of them are necessarily easy, but it’s often possible to get out of a bad car loan if you choose the right strategy. 

Option 1: Refinance 

The best option for getting out of a bad car loan might be to refinance the debt

Once you make sure your current loan doesn’t charge a prepayment penalty (a fee that you will have to pay if you pay back your loan before it is due), you can start shopping around with new lenders for a better rate.

The better the condition of your credit reports and scores, the more money you may be able to save. 

It’s also smart to restrict your rate shopping to a 45-day window so multiple hard credit inquiries will only count against your credit score once.  

Option 2: Trade-In the Car 

Unless your car loan is upside down (which means that you owe more than the vehicle is worth), you might consider trading your vehicle in for a different set of wheels. 

If you can swap out your car for a lower priced car and reduce your overall auto debt, that’s a bonus that could ramp up your potential savings.

Option 3: File Bankruptcy

Filing for bankruptcy is often considered a nuclear option when it comes to debt. A bankruptcy may protect you from your creditors (including your auto lender), but it can take a toll on your credit at the same time. 

Bankruptcy may also make it difficult to borrow any money again in the future, at least at a decent interest rate.

Bankruptcy may not automatically get you out of your auto loan either, unless you file a Chapter 7 and surrender the vehicle. 

A bankruptcy attorney can discuss other options with you concerning your auto loan. 

These might include making your regular payments (reaffirming the debt), getting a reduced payment, or paying the loan off in a lump sum. 

Option 4: Surrender the Vehicle

If you’re considering surrendering your vehicle to the lender, read this first. Surrendering your vehicle is generally a bad idea for multiple reasons.
Giving back the vehicle doesn’t erase your debt and it doesn’t get you out of the promissory note you signed when you took out the loan. 

Even if the lender sells the vehicle to someone else, you’ll still probably end up owing a balance — maybe a big one. 

At that point, you might have to settle the debt or risk being sued by the lender.
Worst of all, surrendering a vehicle could be horrible for your credit score. 

A repossession (voluntary or involuntary) may damage your credit scores. Having a repossession noted on your credit reports may also make it hard to borrow money again down the road. 

How to Avoid a Bad Car Loan in the Future

Before you finance your next vehicle, here are 3 tips that will help you avoid wondering how to get out of a car loan in the future. 

Improve Your Credit

Lenders base interest rates primarily on your credit report and score. If you want to secure a good auto loan, your best bet is to work hard to improve your credit before you apply for financing. 

Shop For The Best Rate

Don’t be impulsive! Jumping into a vehicle purchase and financing head-first can be a recipe for disaster. 

Instead, take the time to compare offers (and vehicles) from several different lenders before you commit to a loan. 

Pay In Cash 

Most people don’t purchase vehicles in cash, but it’s possible. You could start a dedicated savings account now and funnel money to it every month.

When the time comes to buy a new vehicle, you might be able to find a good deal on a used vehicle and pay in cash so that you don’t need a loan at all. 

How To Get Out Of A Car Loan

Remember, it’s easier to avoid a bad car loan in the first place than it is to try to get out of one after you’ve signed on the dotted line. 

Avoid one at all costs. And, if a friend or family member starts to wonder how to get out of a car loan, be sure to share these tips with them so that they can avoid the process. 

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Written By

Michelle Black

Michelle Black is a credit expert with over 16 years of experience in the industry and a freelance writer.