How to Get Out of a Car Loan

Taking out a car loan could make owning a vehicle easier when paying the full price upfront isn’t an option. However, if the payments become too much to handle, what may have been the solution could turn into a source of stress.

While there’s no way to walk away from a car loan without consequences, you can take certain steps to get out of the loan and get back on your feet financially.

Let’s explore your options and how each choice can affect your finances and credit score.

How do car loans work?

A car loan — also called auto financing — is a secured loan you use to buy a vehicle and repay in fixed monthly installments. The vehicle acts as collateral (something of value) to secure the loan. The lender may have the right to take the car back if you fail to make your payments.

Car loans are available from various lenders, including online lenders, banks, credit unions, vehicle manufacturers and dealerships.¹

5 Ways to get out of a car loan

Sometimes life happens, which may require you to shift your finances. If you find it challenging to keep up with your monthly car payments, there are several paths you can take to give your budget a little breathing room.

1. Consider selling your car

Selling your car is generally one of the fastest ways to pay off your loan. You could use the proceeds from the sale to clear the remaining balance. However, this option could be tricky if you owe more on the loan than the car’s value — a situation known as negative equity or being “upside down” on the loan. In this case, you’ll need to cover the difference yourself.² Also, think about whether you’ll still need transportation and the funds to purchase a cheaper vehicle.

2. Ask if you can renegotiate your payment terms

Sometimes, lenders may be willing to adjust your loan terms if you find it hard to keep up with payments. One option they might offer is to extend the loan term, meaning you’re shifting your pay off date to a later date but lowering your monthly payment amount by making more, smaller payments. Paying off your loan balance at a later date may be worth the trade-off of smaller monthly payments. Just remember that extending the loan term may increase the total interest you pay over time, meaning you could end up paying more for the car by the time you pay it off.

If your financial setback is temporary, you may be able to arrange a forbearance to pause payments or adjust your monthly payments to make them more manageable.³ You may still accrue interest costs during that pause. Different lenders have different criteria and decision-making approaches around these options.

3. Look into refinancing your car loan

An auto refinance loan involves taking out a new loan to replace your existing car loan, typically with a different, experienced lender. Refinancing is ideal when you can qualify for a lower interest rate or better terms, specifically if your financial standing has improved. You can typically refinance your car with a loan from a bank, credit union or lender like OneMain Financial. OneMain offers personal loans to refinance your car with fixed payments and clear, upfront terms that fit your budget.

If you’ve improved your credit score since you first took out the loan, for example, refinancing could reduce your monthly payments if you qualify for a lower interest rate.⁴ Since you’re essentially starting over with a new car loan, refinancing can also extend the amount of time you have to pay off your loan and the total amount of interest if that’s what you choose. So, it’s important to weigh out the pros and cons of refinancing before you make a decision.

4. Ask if you can transfer the car loan to someone else⁵

It may be possible to transfer your car loan to someone else, but you’ll want to review your loan agreement or speak with your lender to see if they allow it. If your lender allows you to transfer the loan, then ownership of or title to the car will have to be transferred to the new borrower and the DMV will need to be updated too.

You may be thinking about a transfer if you no longer need the car, can no longer afford the payment or are at risk of repossession.

Many lenders require the new borrower to meet their credit and income criteria before approving the transfer. In most cases, the transfer could result in additional costs or changes to the loan terms.

5. Explore the option to voluntarily have your car repossessed

If no other options work, you might want to consider voluntary repossession. Voluntary repossession means returning the car to the lender, who would then sell it to recover as much of the loan balance as possible.

While this option could help you avoid the cost of a forced repossession, it may still hurt your credit score and leave you responsible for any remaining loan balance after the sale.⁶ Giving up your car is not an easy call to make, so weigh all your options carefully to make the best decision for your needs.

Can you just walk away from a car loan?

Simply walking away from a car loan isn’t an option without consequences. If you stop making payments, you will still owe the lender the remaining balance. Not making payments could lead to the lender taking action like repossessing the car, which can negatively impact your credit score for up to seven years.⁷

If it’s an option for you, paying off the loan in full is a better solution to avoid these issues.

Make the best decision for your budget

Each option for handling a car loan you cannot afford anymore could have long-term financial implications. Before deciding, carefully weigh your options and how they’ll impact your life.

Consulting a financial advisor or trusted friend or family member may help you navigate your situation a little more easily. No matter what you decide, the moment is only temporary and it’s a step in the right direction.