How to Get Out of a Car Loan You Can’t Afford:
Many people find themselves stuck with car loans they can no longer afford due to unexpected expenses or changes in income. Navigating this situation requires practical steps to reduce financial strain without damaging credit.
One effective way to get out of an unaffordable car loan is to sell the vehicle and use the proceeds to pay off the remaining balance. If the sale doesn’t cover the full loan, refinancing or negotiating with the lender for modified terms may help bridge the gap.
Exploring these options quickly can prevent further financial trouble. Understanding how to approach lenders and manage the loan responsibly will increase the chances of a manageable solution.
Assessing Your Car Loan Situation
Knowing the details of the loan agreement, how much is owed versus the car’s value, and signs of financial strain helps identify realistic options for handling an unaffordable car loan.
Understanding Your Auto Loan Terms
The borrower should review the loan contract carefully. Key details include the principal balance, interest rate, loan term, and monthly payment amount. In 2025, the average new car payment is around $650 monthly, with loan terms often lasting 72 months. Interest rates vary by credit score: those with excellent credit (above 750) might see rates as low as 4%, while subprime borrowers may pay 12% or more.
Loan features like prepayment penalties and the remaining months affect payoff flexibility. The 20/4/10 rule advises putting 20% down, financing for no more than 4 years, and keeping total transportation costs under 10% of gross income to avoid undue financial stress.
Calculating Loan Payoff and Vehicle Value
The borrower must calculate the current payoff amount, which includes the remaining principal plus any accrued interest. Contacting the lender provides an exact payoff figure. Next, determine the car’s market value using resources such as Kelley Blue Book or Edmunds.
If the payoff exceeds the car’s value, the borrower is “upside down” on the loan. This situation limits options like selling the car unless the borrower covers the negative equity. Comparing these values helps decide whether refinancing, voluntary repossession, or selling with a buyout is feasible.
Recognizing Signs of Financial Strain
Signs of trouble include missed or late payments, reliance on credit cards to cover loan payments, or reducing essential expenses to afford the loan. The average auto loan balance in 2025 is about $33,000, which can be burdensome without stable income or budget control.
If monthly payments exceed 15% of monthly income, it may signal an unsustainable loan. Declining credit scores caused by late payments further reduce refinancing opportunities. Early recognition of these signs enables timely actions to minimize credit damage or financial loss.
Contacting Your Lender for Options
When a car loan becomes unaffordable, communicating clearly with the lender is crucial. Exploring specific options like payment deferral or loan settlement can ease financial pressure without risking immediate repossession.
Requesting Payment Deferral or Modification
The borrower can ask for a payment deferral if short-term financial hardship occurs. This delays monthly payments for an agreed period without loan default. However, interest may continue to accrue, increasing the total amount owed.
A loan modification changes loan terms permanently, such as lowering monthly payments or extending the loan duration. This approach may suit borrowers who expect long-term financial strain. Lenders typically verify income and hardship before approval.
In cases of bad credit, refinancing may be difficult, but lenders sometimes offer modifications to keep the loan current. Borrowers should prepare recent pay stubs, bank statements, and a hardship letter to support their request.
Negotiating a Loan Settlement
A loan settlement allows the borrower to pay less than the remaining balance to close the loan. Lenders may accept settlements to avoid lengthy repossession and recovery processes.
Negotiation starts by offering a lump sum payment or a structured payment plan. Clear documentation of financial hardship strengthens the case. It’s important to get any agreement in writing.
Settlements can affect credit scores but stop further late fees and collection actions. Borrowers should ask how the settlement will be reported to credit bureaus before proceeding.
Exploring Loan Refinancing Solutions
Refinancing a car loan can reduce monthly payments or lower interest rates, easing financial strain. It’s essential to understand how refinancing works, compare rates carefully, and recognize the best times to pursue it.
How Refinancing Works
Refinancing replaces an existing car loan with a new one, typically under different terms. The borrower applies for a new loan using the car as collateral, ideally with better interest rates or longer repayment periods.
Even those with bad credit can refinance, though options may be limited. Lenders might require a cosigner or higher interest rates. Refinancing with a cosigner often improves approval chances and better rates.
The process involves checking current loan payoff amounts, applying to lenders, and ensuring the new loan covers the old balance. Borrowers must verify fees and penalties to avoid added costs.
Comparing Refinancing Rates and Terms
Interest rates vary by credit score. In 2025, borrowers with excellent credit may find rates as low as 3-4%, while those with poor credit could see rates between 10-15%.
A table example:
| Credit Score Range | Average Interest Rate (2025) |
| 720 and above | 3.5% |
| 660 – 719 | 5.5% |
| 620 – 659 | 8.5% |
| Below 620 | 12-15% |
Terms usually range from 24 to 72 months. Longer terms reduce monthly payments but increase total interest paid. Borrowers should prioritize lower rates and manageable monthly payments without extending too long.
Comparing offers from credit unions, online lenders, and banks is vital. Some personal loans with cosigners present competitive refinancing alternatives for those with bad credit.
When Should You Refinance Your Car Loan
Refinancing makes sense if current payments are unaffordable or if interest rates drop significantly. It also helps when credit scores improve since loan terms can be more favorable.
If the remaining loan balance is high relative to the car’s value, refinancing might be harder or less beneficial. Waiting until you owe less than the car’s worth increases approval chances.
Refinancing is best pursued before late payments or repossession risks occur. Early action helps avoid penalties and preserves credit scores. It’s wise to refinance if better rates reduce payments by at least 10-15%.
Selling or Trading In Your Vehicle
When trying to get out of an unaffordable car loan, selling or trading in the vehicle are common options. Both require understanding how to handle the loan payoff and title transfer to avoid ongoing financial responsibility.
Selling Your Car Privately
Selling a car privately often yields a higher sale price than trading it in. The seller should first pay off the loan or arrange to pay off the balance at closing. Banks can provide a loan payoff quote, which includes the exact amount needed to clear the debt.
Once the loan is paid, the title can be transferred to the buyer. If the lender holds the title, the seller must work with the bank to ensure the title is signed over promptly. This step is critical to prevent the seller from retaining liability.
The seller should provide a bill of sale to document the transaction and comply with state regulations for title transfer. Any remaining loan balance after the sale must be settled to avoid default.
Trading In at a Dealership
When trading in, the dealer handles paying off the existing loan directly. The trade-in value is applied toward the new purchase or used to reduce the loan balance. If the trade-in value is less than the loan balance, the difference becomes a negative equity amount that must be paid or rolled into the new loan.
Borrowers should request a clear payoff figure and confirm the dealer pays off the lender. This protects from continuing payments on the old loan.
Dealers may require a zero-down bad-credit car loan to finance the difference if negative equity is present or if the buyer has poor credit. The buyer should review loan terms carefully to avoid worsening financial strain.
Properly managing title transfer and loan payoff through the dealer simplifies the process but may result in higher overall costs compared to private sale.
Voluntary Repossession and Surrender
Voluntary repossession means turning the car back to the lender instead of waiting for them to seize it. It allows the borrower some control over the process but still impacts finances and credit.
Understanding Consequences on Credit
Voluntary repossession will appear on the borrower’s credit report and usually results in a large drop in credit score. The loan account will show as “voluntary surrender” or “repossessed.”
This event stays on the report for up to seven years. It signals to future lenders a high risk, potentially making new loans or credit cards harder to get.
Debt consolidation that includes a voluntary repossession shouldn’t be expected to raise credit scores quickly. It can take months or years to recover from the damage it causes.
How the Process Works
The borrower contacts the lender, indicating intent to return the vehicle voluntarily. The lender then provides instructions on where and how to surrender the car.
Once surrendered, the lender sells the car, often at auction. The borrower is still responsible for the remaining loan balance, called a “deficiency balance,” after sale proceeds are applied.
Negotiating with the lender for a payment plan or settlement on the deficiency balance is possible. However, not paying the deficiency can lead to collections or legal action.
Transferring or Assumable Car Loans
Some car loans allow the borrower to transfer the loan to another person, relieving them of the financial obligation. Understanding when transfers are permitted and how to find someone to take over payments can help manage unaffordable car loans.
When Transfers Are Allowed
Most car loans are not automatically transferable because the lender approves the borrower based on their creditworthiness. However, a few lenders offer assumable loans, meaning the loan can be taken over by someone else with lender approval. The new borrower must meet the lender’s credit and income requirements.
Dealership financing and loans from credit unions are more likely to allow transfers than traditional banks. To know if a loan is assumable, the borrower must check the loan contract or contact the lender directly. Transferring a loan generally requires a formal application process and a credit check on the new borrower.
How To Find Someone to Take Over Payments
Finding someone to assume a car loan requires clear communication and trust. The borrower can start by informing friends or family who might be in need of a vehicle and have the financial means to handle the loan.
Online marketplaces and social media groups dedicated to vehicle sales or loan transfers can also help reach potential candidates. Detailed information about the loan balance, monthly payments, and any fees should be shared upfront to avoid misunderstandings.
The borrower should ensure the candidate gets pre-approved by the lender before finalizing any agreements. This protects both parties and confirms the transfer complies with lender rules.
Using Home Equity or Personal Loans
Homeowners with sufficient equity may tap into it to refinance or pay off an unaffordable car loan. Alternatively, personal loans, especially those with a cosigner, can offer manageable repayment options with fixed terms.
Pros and Cons of Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) lets borrowers access a revolving credit line secured by home equity. As of May 2025, typical HELOC rates range from 7.5% to 9.5%, depending on credit score and lender.
Pros:
- Often lower interest rates than car loans or unsecured loans.
- Interest may be tax-deductible if used for home improvements.
- Flexible borrowing and repayment schedule.
Cons:
- Home serves as collateral, risking foreclosure if payments are missed.
- Variable interest rates can increase payments over time.
- Requires good credit and sufficient home equity to qualify.
Borrowers must weigh these factors carefully before replacing a car loan with a HELOC.
Best Personal Loans as Alternatives
Personal loans provide fixed-rate financing without collateral, useful for paying off car loans. In 2025, loans with cosigners can secure lower rates, sometimes as low as 6% APR for well-qualified applicants.
Key lenders offering strong personal loan options with cosigners:
| Lender | Typical APR Range | Loan Terms | Features |
| LightStream | 6.49% – 17.99% | 2 to 7 years | No fees, quick funding |
| SoFi | 6.99% – 19.99% | 3 to 7 years | Cosigner allowed, flexible |
| Marcus by GS | 7.99% – 19.99% | 3 to 6 years | No fees, fixed rates |
Personal loans with a cosigner improve approval odds and lower rates but require both parties to maintain good credit. These loans provide consistent monthly payments and avoid putting assets at risk.
Managing Your Credit and Financial Health
Maintaining control over credit and financial standing is crucial when exiting an unaffordable car loan. Properly handling credit impacts future loan options and interest rates, while planning ahead helps avoid similar pitfalls.
How Car Loan Choices Affect Your Credit
Car loans influence credit scores through timely payments and overall debt levels. Making payments late or defaulting typically lowers credit scores, sometimes by 100 points or more in months. Debt consolidation can help manage payments but may temporarily cause a slight drop in credit score.
Lenders look at debt-to-income ratios, so a large car loan can limit borrowing capacity. Using the best credit cards of May 2025 with lower interest rates (average around 15%) can aid in paying down revolving debt, improving credit utilization ratios. However, applying for multiple credit lines simultaneously may also reduce scores.
Planning for Future Car Purchases
Careful budgeting before a new car purchase is essential. Buyers should assess income stability and current debt to avoid overextending finances again. Using credit responsibly—including keeping balances low on credit cards—helps maintain or raise credit scores.
While raising a credit score by 100 points in 30 days is unlikely, steady improvement through consistent payments and limited new debt is achievable. Researching financing options and comparing loan offers based on current credit health minimizes risks of unaffordable loans in the future.
Legal and Tax Considerations
When trying to exit a car loan, it is crucial to understand the legal requirements related to defaults and repossessions that vary by state. Additionally, managing loan settlements can trigger tax obligations, depending on how the debt is resolved.
State Laws on Car Loan Default
State laws determine the process lenders follow after missed payments, including repossession rights and deficiency judgments. In most states, if a vehicle is repossessed, the lender can sell it and pursue the borrower for the difference, called the deficiency balance.
Some states impose limits on deficiency judgments, such as California, which restricts them to the difference between the sale price and outstanding debt. Other states may allow full deficiency recovery, impacting how much the borrower still owes post-repossession.
Borrowers should check their state’s repossession laws, notification requirements, and whether they have a right to redeem the vehicle by paying the debt before sale. Knowing these rules helps anticipate potential legal and financial outcomes.
Tax Implications of Loan Settlement
Settling a car loan for less than the owed amount may create a taxable event. The IRS considers the forgiven debt as cancellation of debt (COD) income, which generally counts as taxable income at federal rates.
The forgiven amount is added to gross income and taxed at the borrower’s federal income tax bracket. For instance, if the borrower falls in the 22% bracket, the forgiven debt is taxed accordingly.
If the loan settlement happens this year, and the borrower received a year-end bonus, that bonus is taxed at a special flat rate of 30% in 2025, separate from ordinary income. The forgiven debt adds to taxable income, potentially pushing the borrower into a higher bracket.
Debt forgiveness is not capital gains, so long-term or short-term capital gains tax rates do not apply here. However, if the borrower owns the car and sells it separately, those sales profits might be subject to capital gains rules, depending on the holding period.
Borrowers should expect a 1099-C tax form from the lender reporting the forgiven amount. They may qualify for exceptions or exclusions in special cases, such as insolvency, but must file proper documentation.
Preventing Future Car Loan Problems
Managing car expenses carefully reduces the risk of falling into unaffordable loans again. Knowing how to budget and save helps maintain financial stability and prevents missed payments.
Setting a Realistic Car Budget
A realistic car budget begins by assessing monthly income and fixed expenses. Experts recommend that total car costs—loan payment, insurance, fuel, and maintenance—should not exceed 15% of take-home pay.
Key budget components include:
- Car loan payment
- Insurance premiums (the Average Cost of Car Insurance (2025) is around $1,750 annually)
- Fuel costs based on driving habits
- Maintenance and unexpected repair costs
Using online calculators can help estimate loan payments and interest. Buyers should consider lower-cost vehicles or longer loan terms to reduce monthly payments.
Strategies for Saving on Car Expenses
Saving on car expenses starts with routine maintenance to avoid costly repairs. An oil change typically costs between $30 and $70, a small price compared to engine damage.
Seven practical tips to save on repairs include:
- Regular tire pressure checks
- Replacing worn wiper blades
- Using approved fluids
- Scheduling tune-ups
- Comparing repair shop prices
- Using warranties wisely
- Avoiding unnecessary repairs
Selling or trading in a car with high monthly payments can also free cash quickly—simple ways to make $100 fast might include side gigs to buffer expenses. Budgeting for fuel by driving efficiently and consolidating trips reduces fuel costs significantly.
