How to Get Out of a Car Loan

You can get out of a car loan early in one of two ways. You can pay off the balance with cash, a new loan, or the money from selling the car, or you can return the car to the lender. What it costs comes down to what you owe compared with what the car is worth. If you owe more, a sale or return leaves a gap you’ll still have to pay, and returning the car does the most damage to your credit.

Ways to get out of a car loan

Call your lender first

If the payment has become hard to make, start with the lender. It costs nothing to ask, and your lender may offer an affordable payment plan, a new due date, or a pause on payments through forbearance. Use the number on your statement or in your lender’s app, and call before you miss a payment.

Refinance your car loan

Refinancing replaces your loan with a new one, ideally at a lower rate. It makes the most sense if your credit has improved since you bought the car. Get quotes from a few lenders. Auto loan applications made within a short window are usually counted as a single inquiry on your credit.

Watch the term

Say you owe $25,000 at 12% with 60 payments left, which is about $556 a month. Here’s how two refinance options compare.

The 72-month loan has the lowest payment, but it adds a year of payments and costs about $1,140 more than the 60-month option.

Sell the car privately

A private buyer will often pay more than a dealer, because a dealer has to leave room to resell the car. Compare trade-in and private-party values on a tool like Kelley Blue Book.

Your lender holds the title until the loan is paid off, so the sale has to pay off the loan first. If the sale price doesn’t cover what you owe, you’ll need cash to make up the difference before the buyer can get the title. Ask your lender how it handles a private sale.

Trade in the car at a dealership

Trading in is the simplest option if you need another car right away. The dealer pays off your loan and applies the car’s value to your next purchase. If you have equity, it goes toward the new car. Get offers from more than one dealer.

If you owe more than the car is worth, the dealer may offer to roll that difference into your new loan. Your next loan then starts out bigger than the car you’re buying, which is risky. CFPB data on auto loans originated between 2018 and 2022 found that borrowers who financed negative equity were more than twice as likely to have the account assigned to repossession within two years as borrowers who traded in with positive equity.

Have someone else take over the loan

Most auto lenders won’t transfer a loan to another person. The usual route is for that person to buy the car and get their own loan for it, which pays off yours. They’ll need to qualify on their own credit and income.

Pay off the loan early

Paying off early saves the interest you’d have paid on the remaining months. Ask your lender for a payoff quote. It’s usually different from the balance on your statement, because interest keeps building until the payment arrives. Check your contract for a prepayment penalty, and ask whether your loan uses simple or precomputed interest.

With precomputed interest, paying early may save less than you’d expect, especially on a loan of 61 months or less. Federal law sets how the interest refund is calculated only for precomputed loans longer than that.

If you bought add-ons like gap insurance or an extended warranty, ask whether you can cancel them for a prorated refund once the loan is paid off.

Voluntarily surrender the vehicle

Surrender means returning the car to the lender. The lender sells it, usually at auction, and applies what it gets to your loan. You still owe the rest, plus costs like towing, storage, and the sale itself. That remaining amount is called a deficiency balance. Your credit report will show the account as a voluntary surrender, and that can stay on it for up to seven years from the first missed payment that led to it.

If you can’t pay the deficiency, the lender can send it to collections or sue you for it. If the lender forgives part of it, that forgiven amount may count as taxable income.

Read more >> Can You Trade In a Car You Still Owe Money On?

‍Returning the car doesn’t always end the debt. In most states, you’ll still owe the gap between what the car sells for and what you owed, plus the costs of towing and selling it. Because these rules vary by state, a licensed attorney or nonprofit credit counselor can tell you how they apply where you live.

The National Foundation for Credit Counseling offers free or low-cost counseling at 800-388-2227.

What to consider before getting out of a car loan

What you owe compared with what the car is worth

If the car is worth $25,000 and you owe $30,000, you’re upside down on the loan. That means you owe more than the car is worth, in this case $5,000 more. Selling privately might narrow that gap, but you’ll still need to cover the rest before the lender releases the title.

If the car is worth about what you owe, you can break even. If it’s worth more, you can keep the difference or put it toward your next car.

How each option affects your credit

• Refinancing or trading in. You get a hard inquiry, and a new account is added to your report. The effect is usually small and short-lived.
• Selling or paying off. The loan closes as paid. It stays on your report for up to 10 years as a positive account.
• Surrender. This has the biggest impact. The account shows as surrendered, and any unpaid deficiency can become a collection account.

Fees and penalties for early payoff or surrender

Check your contract for a prepayment penalty before paying off early. With a surrender, expect the lender’s repossession and sale costs to be added to what you owe.

Run the numbers >> Before rolling negative equity into a new loan, see what refinancing your current one would do with Kikoff’s auto loan refinance calculator.

Bottom line

The cheapest way out of a car loan is usually the one that leaves no gap to pay: refinancing, or selling or trading in when the car is worth at least what you owe. Most of these exits end with another car loan, and the credit you bring to that application sets your rate on the whole balance.

A Kikoff Credit Account adds on-time payments to your Equifax, Experian, and TransUnion reports every month. There’s no credit check to sign up, and plans start at $5 a month.