How to Get Out of A Car Loan

You don't have to be stuck with a bad car loan. There are a number of ways that you can be released from your loan obligation. Here are a few ways for how to get out of a car loan, including the pros and cons of each option.

For one, repossession is not an option. Whether a repossession is voluntary or involuntary, the results are almost identical. Your credit score gets nailed and you owe several thousand dollars to the lender. The only difference is that you save a few hundred bucks in repo fees if your repossession is voluntary (aka you hand over the keys).

Most people get out of a car loan by choosing to get into an even worse loan. Trading in your car might work if you can get a new lender to roll the old balance into a new loan, but you will pay for it big time. Consider that the dealer expects to profit about $2,000 on your trade in and another $2,000 on the car you just bought. That's a minimum loss in value of $4,000 every time you trade up.

If you or your spouse is a military service member, then you can reset your interest rate to 6% APR during any period of deployment. The Servicemembers Civil Relief Act limits interest charges from the time that orders are received until after active duty has been completed. It can also negate a lease.

For everyone else, refinancing the loan is going to be the desired option. That way, you get to stay in the same car and repay the loan at a lower rate. You can keep the remaining term the same and reduce your monthly payments. Alternatively, you may shorten the term and keep paying about the same payment. A lower rate will allow you the flexibility to reduce your monthly payment to a more affordable amount.

You may be tempted to sign with one of those third party companies that claim they can negotiate with your lender (for a fee) to modify your car loan. These car loan modification scams are pretty widespread, and most victims fail to recognize the scam until after they have paid hundreds of dollars only to have their cars repossessed due to lack of payment.

When a permanent lower payment is your goal, you should refinance the loan into a new loan that allows for a lower payment. Avoid stretching the loan out too long since the loan could outlive the car. If you can normally make your regular car payment but are temporarily short on cash, contact the lender directly to ask them to modify the terms of your loan to allow for you to stay current. Many lenders are willing to move your skipped payment to the back of the loan so that you can stay current on the loan, avoid late fees and prevent substantial credit damage.

Whatever you do, it is essential to avoid repossession. A repo does not excuse you from what you owe. You might be surprised at just how much you still owe after a repossession. A low sale price to a bidder combined with costly repo fees, storage fees and legal fees might leave you owing 80% or more of the loan balance with no car to show for it.