For most people, a car is a necessity rather than a luxury to get to work, school, or other everyday needs, and an auto loan is a great way to get behind the wheel.
But sometimes buying expensive cars can lead you to a very dire financial situation.
And did you know according to LendingTree, Auto loan is the third largest debt in the U.S. and Americans owe $1.52 trillion in auto loan debt. This accounts for 9.2% of American consumer debt.
If you are also on the threshold of becoming upside-down on your car loan and looking for possible solutions to become debt-free, we are here to help.
In this post, we’ll discuss how debt works and share some best solutions to get out of your car debt as soon as possible. Let’s get started!
- You can get a car loan from banks, credit unions, private lenders, car dealers, and other financial institutions.
- Until you don’t pay the entire car loan amount, the car’s ownership stays with the lender.
- If you want to come out of your car debt, then you can choose to refinance your loan, renegotiate with the lender, sell the car, or do voluntary repossession.
- Repossession can wreck your credit score.
What is a Car Debt?
Car debt is a secured installment loan strictly used to purchase a vehicle.
The loan amount is paid in the form of monthly payments throughout the loan term, and the lender retains the ownership of the vehicle unless you pay back the principal amount in full, plus interest.
How Does Car Debt Work?
There are several ways to get car loans, including banks, credit unions, private lenders, car dealers, and other financial institutions.
Regardless of where you apply for the loan, the creditor will check your credit history, income, employment, and other debts you have before approving you for the loan.
Once you get approved for the car loan, the lender will pay the loan proceeds to the car seller, and you will pay back the money to the lender in monthly installments over the loan term.
The shorter the loan term loan, the higher the monthly payment and the interest paid, and vice versa. 1
Ways to Get Out of a Car Debt
If you no longer afford your monthly payments, here are some potential ways to get out of your car debt:
1. Refinance Your Loan
Refinancing your car at a shorter repayment term with a lower APR would allow you to pay off the negative equity fast.
The less you pay in interest, the faster you will get out of your car debt.
The longer repayment term may also decrease your monthly payments, but with increased overall debt.
2. Renegotiate with your Lender
Another way is to reach out to your lender and negotiate a new repayment plan.
Tell them about your situation and request them to make your monthly installments more affordable or stretch the loan term until you get back on your feet financially.
3. Sell the Car
Though it is not ideal, you may also consider selling your vehicle. If you are unable to make the monthly payments, you are going to lose the vehicle anyway.
By selling the vehicle to a private party, you will get enough cash to pay for a down payment on a less expensive car.
4. Voluntary Repossession
Returning a car is not a pleasant experience, but it is still better than repossession, which can wreck your credit score.
If you have defaulted on your car loan, and have no other options left, voluntarily surrender the vehicle to the lender and get a more favorable final pay-off.
5. Get a Personal Loan
To cover the cost of your negative equity, you can choose to get a personal loan.
This option can be helpful, especially when you have a very good credit score of 670 or more and can qualify for a low-interest rate loan. 2
Tips from Reddit Users
How to get out of a car loan
by u/randomdude9976 in personalfinance
How Will Getting Out of a Car Debt Affect My Credit?
Depending on which path you choose to deal with your car debt, the effect on your credit score may vary:
- Refinancing your auto loan: If you decide to refinance your auto loan, then it will impact your credit score. However, it would only call for a hard inquiry which will take no more than five points off from your credit score. So refinancing your auto loan is a safer option.
- Selling the car: Selling your car and paying your debt in full will not have much impact on your credit score. However, if you replace your car loan with a new one on a cheaper car, it will call for a hard inquiry that will lower your credit score for a while.
- Voluntarily repossession: If you cannot repay your car debt and choose to go with this option, it will definitely hit your credit score. And by the time this happens, you might have missed a few payments already, all of which will damage your credit score to a great extent.
- Renegotiate with your Lender: Depending on what you have negotiated with your lender, it may or may not affect your credit score. For example: if you decide on a new repayment plan, then it will show that you are not able to make payments as agreed upon previously, and this will plummet your credit score. 1
Avoiding an Auto Loan That You Cannot Afford
To avoid getting loans that you cannot afford, educate yourself about the loan, the terms, and conditions, payments, etc.
You can use an auto loan calculator to check the cost, interest rate, monthly payments, etc., that you will have to make.
This will educate you and will help you prepare for what you are getting yourself into. Consider making a large down payment to have an affordable monthly payment.
Avoid Going Upside Down on a Car Loan
Going upside down on a car loan means owing more than the value of the car and is also called having negative equity or being underwater.
Here’s how you can avoid being upside down on a car loan:
- Have a shorter repayment term: Although a longer downpayment makes it possible for you to pay affordable monthly payments, it has poor consequences if you are not careful. A longer repayment term can make it easier for depreciation to outpace your repayment, and this is not what we want.
- Make a substantial down payment: New cars depreciate very quickly during the first year and keep depreciating over time. If you make very little or no downpayment, then your car will depreciate faster as compared to being able to pay off the loan. So make sure you make a big downpayment; it will help in preventing negative equity. 3
How To Get Rid of Negative Equity?
How To Buy a Car Without Taking a Loan?
Buying a car without a loan might not be easy, but it is a great thing to do.
You can do so by saving up or by saving up in investments.
It might get difficult to save enough to make the payment in cash, especially if you do not have much room in your budget. But paying the full amount in cash can save you a lot in interest.
You can also purchase a second-hand car. Paying the full amount in a lump sum is much easier for a second-hand car besides, it is also a financially prudent thing to do, keeping the whole depreciation thing in mind. 4
We all dream about buying a car, and often the one that is quite out of our budget.
However, there is a big difference between dreaming and actually buying a car that we cannot afford.
So make sure you buy a car that you can afford to avoid getting into car debt. And try to make the full payment or a huge amount of downpayment to remain safe.
We hope this article on how to get out of car debt was helpful to you.
Can car loan be forgiven?
Some creditors might be willing to let go of the loan amount if you turn over your car voluntarily.
However, turning over your car does not mean your creditor will forgive your loan. You should call your creditor and ask them if they are willing to agree to the same. 5
What is the best way to get out of a car loan without ruining your credit score?
If your car is worth the balance or close to the amount you owe, then selling it off can be a good way to get out of your car loan without damaging your credit score.
Is it possible to walk away from a car loan?
Yes, it is possible for you to walk away from your car loan on your terms by voluntarily surrendering your car, but this will damage your credit score.
However, this is a much better option than car repossession and will also help you in avoiding repossession costs. 6
Traci is a highly experienced debt resolution expert with over 8 years of expertise in helping people become debt-free through various debt relief programs. As a former employee of a well-known debt relief company, she possesses exceptional knowledge and skills to take care of debt-related issues.
When not writing about debt, Traci can be found conducting in-depth research on the latest developments in the industry to ensure that she stays up-to-date with the latest trends and strategies.
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