How Will Getting Out Of A Car Loan Affect My Credit
The ways getting out of a car loan can affect your credit depend largely on which path you choose:
- Selling the car: If you sell your car and pay off the loan in full, it won’t have much of an impact on your credit score at all. That said, if you replace your loan with a new one on a cheaper car, the hard credit inquiry may temporarily lower your credit score a little.
- Negotiating with your lender: Depending on what you and the lender end up deciding, it may or may not impact your credit score. If you get on a longer-term modified repayment plan, it may report that you’re no longer making payments as originally agreed, which could impact your score and how future lenders view you.
- Refinancing your auto loan: As with replacing your current car with a new one, refinancing your car loan will impact your credit when you apply for the loan. That said, in most cases, one new hard inquiry won’t take more than five points off your credit score, if it affects your score at all.
- Voluntarily surrendering the vehicle: If you have no other options but to give up your car, you won’t be able to avoid damage to your credit score by voluntarily surrendering the vehicle. By the time it occurs, you’ve likely already missed some payments, which can wreak havoc on your credit history, and have been threatened with repossession. However, giving up the car instead of waiting for the lender to seize it may look better to lenders reviewing your credit report in the future.
Remember To Retitle The Car
Getting your ex off the loan is one thing, but if youre a co-borrower, youll also need to consider whos on the title. Generally, both borrowers are listed on the car title, which might be something you want to avoid if youve split with your ex for good. If the other person is also listed on the title, they can take the car away from you and there may be little you can do about it.
Luckily, there might be an easy out for you in this case. Check the owners listed on your cars title. Specifically, look for and/or in between your names. If its an or, as in, John Doe or Jane Doe, it should only take one of you to retitle the car in your own name. But if its an and, as in John Doe and Jane Doe, both of you will need to go to your states motor vehicle department and consent to retitling the car in just one persons name.
Get Preapproved For An Auto Loan
Once youve narrowed your search to a few lenders, its time to request interest rate quotes and compare offers. Getting lenders to compete for your business helps you get the best rate. Also, because lenders weigh factors in your credit report differently, car loan interest rate offers can differ widely.
When applying to lenders, you can be pre-qualified or preapproved for a loan. These are different, and it’s important to know what each one means.
Pre-qualification provides an estimate of the rate and loan amount you might expect to qualify for, based on a limited amount of information the lender has about your credit history. Pre-qualification requires only a soft credit pull, so it will not lower your credit score. However, the estimated rate you are given could change considerably once a full credit check is done.
Preapproval is a step up from pre-qualification. It requires a hard credit pull, temporarily lowering your credit score. Because the lender has more information about your credit history, and personal information you provide, the estimated rate should be closer to the final rate you receive upon loan approval.
If youre really ready to buy your car, getting preapproved for an auto loan offers several advantages, such as giving you more negotiating power at the dealership and protecting you from marked up rates.
Multiple hard credit inquiries in a short time are counted as just one inquiry.
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Fair Option: Sell The Car And Pay Off The Loan With Proceeds
If you donât see any way to keep up with your car payments, it could be a good time to sell the vehicle and buy something that is a better fit for your budget. When you sell the car, you can use the proceeds to pay off the remaining loan balance.
If youâve never sold a car, the best way to sell for the highest value is a private sale to another individual.
Selling a car to a dealership or car lot is easier but may lead to a lower sale price. When selling to an individual, make sure to get paid with a cashier check or similar to ensure you donât lose out due to fraud.
Some auto loans may be âunderwater,â which means you owe more on the loan than the car is worth . This is most common when buying expensive new cars, as the value goes down quickly.
If you sell a car with a loan thatâs underwater, youâre still going to have to pay the difference to pay off the loan.
Learn more about what it means to have an upside down car loan HERE.
Trade In Your Car For A Cheaper One
If it is the high purchase cost of the vehicle that is causing unmanageable payments, you can trade in your car for a cheaper one. The advantage of this is that you can reduce your monthly payments quickly through the exchange. It is likely that you wont be able to pay off the entire loan, but it can at least get you out of deep waters and into the shallows.
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How To Get A Car Loan
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Recap: How To Get Out Of Your Car Loan
Turning to your lender is always the first step if youre having trouble with car payments. You can also get out of your car loan by refinancing to better terms, selling your car or turning it in to your lender through voluntary repossession. Whatever you choose to do, take action before you get too far behind on payments and default on the loan.
Gen Z Has The Highest Share Of Late Auto Payments
Gen Zers are struggling the most of any generational cohort to keep up with auto loan payments. However, U.S. consumers of all generations had a harder time making timely payments on their auto loans at the start of 2022 compared with last year. Year-over-year increases in late payment rates were most dramatic for millennials and Gen Z auto owners their incidence of individuals with late payments increased by 13.4% and 12%, respectively.
How Do I Qualify For A 0% Apr Car Deal
0% APR financing is often reserved for consumers with an exceptional credit score of 800 or higher. Before you begin shopping for vehicle finance, you should independently review your credit reports. Additionally, each lender has its own definition of excellent credit, and eligibility restrictions may differ from car to vehicle.
Consulting the vehicle dealer in advance is your best bet if you are eyeing a 0% APR car loan. While you are at it, map out the eligibility requirements for interest-free financing. In addition to your credit score, an auto lender may also examine the following while reviewing your application:
- Debt-to-income ratio.
- Employment background.
- Address and income verification.
Regardless of whether your credit is good, bad, average, or exceptional, you should also seek preapproval from alternative finance companies. Preapproval can help you analyze your alternatives and provide you with an alternative if you do not qualify for the automakers special offer.
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Pressure To Sign Paperwork
Youre probably familiar with the stereotype of the slimy salesman. Hell sit or stand by his desk, heaping platitudes upon you while encouraging you to sign line after line of paperwork until BAM! youve got yourself a loan.
However, in rushing you through the paperwork, youll have overlooked all the nasty details that make your car loan predatory and a downright bad decision.
The Federal Truth in Lending Act requires finance companies to provide you with a disclosure that outlines certain types of information about your loan, such as its APR and fees. TILA disclosures also inform you about potentially costly aspects of your loan, such as prepayment penalties.
If youre being offered a predatory car loan chock-full of garbage terms, it makes sense for the lender to want to rush you through signing it without giving you the chance to read and think about whats in it.
Move Your Debt To A Balance Transfer Credit Card
If youre struggling with monthly repayments or paying off a loan with an APR higher than 36%, you might save by moving it to a balance transfer credit card. This option might not be the best if you have bad credit or low income, though. You could have difficulty qualifying for a credit card with a high enough limit or favorable rates.
Even if the credit card comes with a higher rate than your current car loan, you may be able to take advantage of a 0% APR promotional period sometimes as long as 18 months. Youll be responsible for minimum monthly repayments, giving you the flexibility to make your repayments fit your budget.
Quick tip: Dont just pay the minimum
If you choose this method, commit to making fixed repayments each month that you can afford to. Only making the minimum monthly repayment can quickly land you with an unmanageable pile of debt when interest kicks in.
How Do You Get Upside Down On A Car Loan
There are a few different ways you can find yourself with an upside-down car loan:
Your down payment was too small. Saving for a car takes a lot of time and not everyone has the patience or endurance to save up the cash they need to make a purchase this big. For most people, throwing a small wad of cash at the car and getting a loan for the rest is the easy choice. But is it the best choice? Definitely not.
Your loan has a high interest rateouch. Youre sitting in the front office chatting with the smooth-talking salesman. He says hes got a deal for you . . . Oh, youre not paying with cash? We can definitely help you out. Just sign here and these keys are yours! What he doesnt tell you is your interest rate could add up to a whopping 13%! Yikes.
Your car is just too expensive . You know you cant afford the car when you have to tell Fido his dog food no longer makes the cut every monthnot to mention the electric company. Its easy to get caught up in purchasing the car thats way outside your budget. Our wants start dressing up as needs and it can be hard to tell the difference between the two. Its hard to say no to the newer modelespecially when it has seat warmers!
How Do I Get Out Of A Bad Car Loan
Its not always possible to avoid a predatory car loan. If you desperately needed a car and had no other options, you may have been willing to agree to bad terms to get back onto the road. Or maybe you just werent aware of what made up a good loan.
No matter your reasoning, youre not without options for getting out of a bad loan.
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Ways To Get Out Of An Auto Title Loan Without Losing Your Car
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In a Nutshell
A car title loan allows you to get cash by using your carâs title as collateral. These loans are based on your carâs value, not your credit, so you donât need to go through traditional loan approval processes to get one. Though these loans may seem like an ideal solution to an emergency need for cash, their high-interest charges, and extremely short loan terms make them difficult to manage.
Written byChiara King.
Car title loans are a quick and easy way to get cash in a hurry by using your vehicleâs title as collateral. These loans are based on your carâs value, not a credit check, so you donât have to go through a traditional loan approval process to get one. Though these loans may seem like an ideal solution to an emergency need for cash, their high interest charges and extremely short loan terms make them difficult to manage. They also increase your risk of having your car repossessed.
If you currently have a title loan, the best thing to do is to get out of it quickly. The following ideas may help you do that.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
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Try Auto Loan Refinancing For Better Terms And Conditions
If you find yourself locked in a bad car loan, auto loan refinancing is one of the easiest options to get a better deal. Refinancing involves taking on a new loan from a new lender that completely pays off your current auto loan. You can then start repaying the new loan, which will typically have a lower APR, a better loan term, or both.
Consumers can save at least $100 on average per month and thousands every year through auto loan refinancing. Other benefits of refinancing include:
- Compare rates and shop around with different lenders before applying
- Adding a co-signer or co-borrower to the loan
- Add other benefits like GAP Insurance and ESC to the loan
- Get cash in hand based on your vehicles equity through cash-back auto refinancing
- Buy out your car lease
Car loan refinancing is an excellent option if your credit score has improved since the time you originally took on your current loan. However, ensure your current lender does not have a pre-payment penalty a fee for paying off the loan before schedule.
Getting Out Of An Auto Loan
There are a few different ways to get out of an auto loan you no longer want. If you want to protect yourself and credit, though, you need to avoid default and repossession.
If you return the vehicle to the dealership because you no longer want to pay on the car loan, its classified as a voluntary repossession which impacts your credit like a traditional repo and can be devastating to your credit score. A repossession can also make it difficult to qualify for an auto loan for at least 12 months with many lenders since most dont approve borrowers that have a repo on their credit reports thats less than a year old.
However, if you just stop paying on the car loan because you cant or dont want to and don’t return the vehicle, the missed and late payments can lead to repossession and massive damage to your credit reports.
If you want out of an auto and want to avoid ruining your credit in the process, here are three suggestions to consider:
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How To Get Rid Of Your Car Loan For Good
Cars are the most expensive thing we buy that go down in value. Its like lighting a match to a pile of money every time you drive down the road! And while theres nothing wrong with having a car, you dont want to be in debt over it.
But what if you could put that car payment into your bank account instead of handing it over to a lender every month? Imagine driving a paid-for car, having a solid emergency fund, and still having enough money to put toward your future. This isnt just a pipe dreamits totally possible.
If youre tired of debt holding you back, Financial Peace University can help. This course teaches you how to take control of your money and make the best financial choices to get where you want to be. And in Lesson 2 of FPU, youll learn how to dump your debt for good!
Dont let your car loan keep you stuck. Its time to make progress. Start FPU today!
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.Learn More.