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How to get out of car finance and how to know you got a bad loan

The world of finance is constantly changing. There are cyclical changes in interest rates, and average credit scores fluctuate with the economic fundamentals of every country, causing loan conditions to vary from time to time. In that line, there are times you sign for a car loan that could not be the best in a few months or years. That’s the moment you should get interested in how to get out of car finance. 

Over two million auto loans are originated every year, which amounts to over 53 billion dollars annually, according to the Consumer Financial Protection Bureau. Obviously, not every loan is suitable for customers, or some of those loans were extended to borrowers during times of hardship. 

What should you do when your finances and your budget improve? Let’s talk about the best way to get out of a car loan, even when you have a complicated contract. 

In other words, if your economic situation improves, so should your interest rates and loan terms. Are you ready?

Why would you want to get out of your car loan?

The car loan you have been offered is a secured installment loan that you can use to buy a new or used car. Accordingly, it is your responsibility to abide by the conditions you signed. Unfortunately, there are times when you are unable to meet those requirements or simply find better ways to spend your money. 

Among the reasons you may find to want to get out of a car loan is to find better conditions as your credit score and budget improve over time. Alternatively, you may have an upside down car loan in which you have a negative equity price ratio, or you may not be able to afford the monthly payments. 

That being said, let’s explore how car loans work before understanding the best way to get out of your car loan.

How do car loans work?

You should understand how auto loans work before you learn how to get out of a car finance contract. It is important that you realize that as a secured installment, you can lose your car if the monthly payments are not made. 

Generally, auto loans require good credit reports, so if you don’t have a good score, you should work on improving it. Your credit score will determine your interest rate and how flexible your terms will be. 

The average loan term ranges from 12 to 84 months, with 72 months for new cars and 65 months for used cars being the most common terms. 

There are many companies that offer auto loans, including dealers, the financial divisions of automakers, banks, credit unions, and even online lenders.

How to know if I have a bad car loan? 

In general, a bad car loan for you is one you can’t afford to pay or one that is too expensive, given your economic and credit conditions. It means that if you cannot afford the monthly payments or there are better loan terms available for people in your very same situation, you may have a bad loan. 

It’s also possible to find yourself with a bad loan if you change your credit score and it no longer represents your improved economic status. However, the terms remain the same. Likewise, when your loan is more expensive than the car’s market value, or when you are upside down on a car loan. 

Simply put, you have a bad car loan if it requires too much effort to pay it, you can not even afford the monthly installments, or the loan is more expensive than the vehicle itself. Of course, this is the right time to understand how to get out of a car finance which is hurting your economy.

What is an upside-down car loan? 

You may find it strange, but upside down car loans are more common than you think. Researchers at Edmunds found that more people are trading in negative equity cars than ever before. 

In April 2020, “the share of new sales with a trade-in involving negative equity hit 44%, and the average amount of negative equity reached $5,571 — both all-time highs,” the study said. 

Image by Edmunds

Upside-down car loans happen when you owe more money than your vehicle is worth and, therefore, your car is in negative equity. 

One of the most common reasons you end up upside down on a car loan is when you buy a new brand car, and the value of your vehicle collapses just as soon as it leaves the dealer. 

You can also get into a negative equity situation in your car if you don’t make down payments. As noted by Debt.org, cars depreciate 20 percent almost immediately after you leave the dealership, and they lose 50 percent of their value by the third year. “If you don’t put at least 20% down, you’re upside down right away,” Debt.org says. 

Long-term loans and high interest rates are also common reasons why you can get upside down on your auto loan. Therefore, you should understand your finances and boost your credit score before you shop for a vehicle. 

On the other hand, the best way to get out of an upside-down car loan is to make as many payments as possible. Additionally, you can always sell your car.

How to get out of a car loan

You will experience changes in your economic conditions as your life progresses. All of us consider our financial situation before financing a car. Even though we are committed to repaying loans, there are times when we simply are not able to do so. 

For those moments, we have a shortlist of options you may check and find the best way to get out of a car loan.

Learn what’s your car’s current market value

The first thing you should know about your car is how much it is worth and how much you owe the lender. Afterwards, you’ll discover if you’re upside down or if you have some equity in the car, and how much room you have. 

Understand your finances

Secondly, you should understand your financial situation. Do you think this hardship will pass soon, or is it a sign of a volatile time ahead? How much monthly payment can you afford now, and how is your credit? That will help you in case you want to talk with your lender or even look for refinancing. 

Talk to your lender about your car finance

Some lenders will be open to negotiating with you if you get burned by your financials. They don’t want you to lose your car, and it is not worth it for them to take your vehicle back. Go and talk with your lender and see if you can make a deal. In the case of temporary financial difficulties, he can offer you a pause in your payments. 

Lenders typically have policies in place for people facing financial problems. Contact your lender for information. Who knows what they might be able to offer. 

Refinance your car

When you get yourself into a bad car loan, but your credit score and economic conditions have improved, refinancing may be a great option for you. It can also be a good option when market interest rates have gone down. 

When you think about how to get out of a car finance, consider switching lenders or seeking a new car loan. If you do so, you may be able to obtain better terms. On the other side, consider the fees and associated costs of a new loan. 

Transfer your car loan

In some cases, the amount of money you owe coupled with the value of your car can mean that trying to sell your car and then paying off your loan simply isn’t worth it. During those times, finding a person who is willing to take the debt on is a great idea. 

Hold on a second! Would anybody be interested in paying my debt? Well, you will not ask him to pay your debt, but you will ask him to purchase the vehicle for the balance you still owe. It is as simple as transferring the title and the car loan to the new owner, and he or she will continue to make payments. 

Trade-in a car

Another way to get out of a bad car loan is to buy a new car and trade in your old vehicle as a down payment. If you are upside down on your loan, this is a good option as dealers are always eager to sell you a new car. 

Sell your car

If you still have equity in your vehicle, selling your car is always a good way to get out of a bad loan. You will be free of your debt, and you will still have some bucks to spend. Make sure you inform your lender that you will be selling your car as they may have some conditions. 

Voluntary repossession

Giving back your car to the lender is an option, but it will be a painful decision. The option of voluntary repossession will damage your credit rating, so borrowers should use it as their very last resort. 

If you give your car to your lender in voluntary repossession, he will put it up for auction and sell it for the best price. If the amount of money doesn’t cover the loan, you will have to pay the difference. 

Default on the loan

If you don’t have the money to meet your obligations, you can stop making your monthly payment. However, it is a bad idea as it will damage your credit a lot. If you default on your loan, it will affect your credit for many years, you will lose your car, and the relationship with the lender will be broken. 

It is always possible to reach out to your lender and find a solution if you think your debt is at risk of default.

How to get out of a car finance? Understand your long-term consequences, and do not forget about your credit score!

When your economic conditions worsen, you always focus on reducing your expenses and become more efficient with your money. In that line, it is an excellent point to understand how to get out of a car finance; however, it is also a good idea to understand your long term consequences.

What will it happen with your credit score if you let your car loan default or if you even go bankrupt? It will damage your credit report for many years. So, it would be a better idea to talk with your lender and find a solution together.

Always consider how getting out of a car loan will affect your credit. It is not the same if you opt for an auto loan refinancing or decide to sell your car, or talk with your lender.

If possible, just avoid decisions that will hurt your credit history like bankruptcy, default or car repossessions.

Think wisely and protect yourself!

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