How Can You Get Out Of A Bad Car Loan?

Staying in a bad car loan with high monthly payments can play havoc with your finances! Here’s how to get out of a bad car loan and save your hard-earned money.

When buying a car, it’s only natural that the excitement of getting behind your favorite vehicle outweighs other considerations. Most people only pay attention to whether they can afford to finance their car through loans, and do not take into account the long-term effect of paying a loan. However, they do sit up and take notice when they realize they’ve been given a bad deal which is causing them to bleed money!

So what’s the best way out of a bad loan? We’ve broken down all the options you can consider to avoid those loans that do you more harm than good.

What Is a Bad Car Loan?

A bad car loan is one that causes you to spend more money than usual while paying off the loan. According to ConsumerReports, Americans pay an average of nearly $600 on monthly car loan payments – up 25% from 2021. These high loan payments have resulted in financial troubles for a majority of Americans, with thousands at risk of defaulting.

Some of the main reasons consumers end up with bad car loans include:

• You did not negotiate for a lower rate with the dealer
• You were charged a high APR, resulting in high monthly car loan payments
• If you were given an APR higher than normal for your level of credit score
• The loan term is too long, causing you to pay more in interest charges on your car
• You are “upside-down” on the car loan (you owe more than the car is worth)
• You agreed to the car loan without including hidden charges, dealership fees, sales tax, etc

How Can You Get Out of a Bad Car Loan?

While it isn’t easy to get out of a bad car loan, you can still follow these guidelines to try and extricate yourself from a financial mess.

Understand How Car Loan Payments Are Calculated

It’s easier to avoid a bad deal than get yourself out of one after you’ve been locked in. If you’re looking to take on a new car loan and want to avoid a bad deal, it helps to know how car loan payments are calculated. Besides the showroom price of the vehicle, you have many other additions and deductibles that need to be considered to arrive at the final purchase price of the vehicle, like:

• Sales Tax
• Trade-in value of your car (if exchanging)
• Brand loyalty rebate
• Dealership and processing fees
• Down payment on the loan

Try Auto Loan Refinancing for Better Terms and Conditions

If you find yourself locked in a bad car loan, auto loan refinancing is one of the easiest options to get a better deal. Refinancing involves taking on a new loan from a new lender that completely pays off your current auto loan. You can then start repaying the new loan, which will typically have a lower APR, a better loan term, or both.

Consumers can save at least $100 on average per month and thousands every year through auto loan refinancing. Other benefits of refinancing include:

• Compare rates and shop around with different lenders before applying
• Adding a co-signer or co-borrower to the loan
• Add other benefits like GAP Insurance and ESC to the loan
• Get cash in hand based on your vehicle’s equity through cash-back auto refinancing
• Buy out your car lease 

Car loan refinancing is an excellent option if your credit score has improved since the time you originally took on your current loan. However, ensure your current lender does not have a pre-payment penalty – a fee for paying off the loan before schedule.

Renegotiate with Your Dealer

If you don’t want to refinance yet and are just behind on a few payments, it could help to talk to your lender. For example, you can ask for a temporary forbearance which will pause your payments for a short period. Some lenders may also change your monthly amount to a more manageable level, giving you more time to find your bearings.

However, this option may not work all the time. The lender may have sold your loan to a third-party financial institution and could be reluctant to renegotiate terms.

Trade in Your Car for a Cheaper One

If it is the high purchase cost of the vehicle that is causing unmanageable payments, you can trade in your car for a cheaper one. The advantage of this is that you can reduce your monthly payments quickly through the exchange. It is likely that you won’t be able to pay off the entire loan, but it can at least get you out of deep waters and into the shallows.

Consider Getting Rid of Your Car/Selling It to Another Party

If both trading in and refinancing do not seem feasible due to your poor credit or vehicle eligibility, then the only way to get out of the bad loan is by selling off the car. However, the fact that you do not own the car completely (that happens only when you pay off the loan) can complicate things. Therefore, you need to first contact the lender, let them know you want to sell the car, and complete all the paperwork required to transfer the lien to the new owner.

The advantage of selling off the car is that you can pay off a large amount of the loan quickly. It is likely that you won’t be able to pay off the entire loan, but it can at least get you out of deep waters and into the shallows.

Voluntary Repossession

The last resort to get out of a bad car loan is to allow the lender to repossess the vehicle. You can do so by voluntarily turning in the car and asking the lender to clear the loan. You can save the lender a lot of paperwork and hassle, and also get a favorable payoff amount in the process. Going down the voluntary repossession route might hurt your credit score – but it’s a hit you’ll have to take compared to the damage caused by possible future defaults.

Common Mistakes to Avoid While Trying to Get Out of a Bad Loan

Here are the things you SHOULD NOT do while attempting to get out of a bad car loan:

Do Not Extend the Loan Term

It will seem tempting to extend your loan term to get lower monthly payments. However, doing so will only cost you more in interest. Always choose a loan term between 24-60 months for the best results. 72-month and 84-month terms will incur huge interest charges and you might end up “upside down” on your loan.

Do Not Choose Refinancing without Comparing Different Offers and Rates

Use refinancing aggregators like Way.com to compare different refinance rates and shop around for better deals. You can also use the pre-approval process through a soft credit inquiry to quickly find out which offers you qualify for, and whether you can save money on them.

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