How to Get Out of a Bad Car Loan

There are several reasons you may feel that you're stuck with a bad car loan. The selling price of the shiny new car you bought may have been too high. The trade-in amount the dealer gave you may have been too low. You may now realize that the car loan you signed up for has an annual percentage rate (APR) that's too high. Or maybe you bought some extras from the finance department that were too expensive, unnecessary or both. If that's the case, you may be wondering how to get out of a car loan entirely.

It's a terrible feeling to realize that your car deal is a bad one, especially since it's rarely possible to return a car you've recently bought. People stuck in bad car deals often assume that since the contract has been signed and the car is in their driveway, nothing can be done to make things better. That isn't necessarily true. Fixing aspects of a bad deal isn't impossible. In some cases, it can be done months or even years after you've bought the vehicle.

One thing you shouldn't do unless it's completely unavoidable is to stop making your car payments. Doing so is likely to significantly hurt your credit score, and a few missed payments in a row could lead to a repossession. If you find yourself in a tough financial position, you may be able to work with your lender to make your car loan fit into your budget.

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Can you back out of a car loan after signing?
How to refinance your car loan
Steps for refinancing your auto loan
Undoing insurance and warranties
Cancel extras first, then refinance
Sell your car

Can you back out of a car loan after signing?

If you're unhappy with the sale price of your new car or think you got too little for your trade-in, chances are you won't be able to alter those terms after the deal has been signed. If you signed the sales contract, you own the car.

But if you're unhappy with your car loan, you may be able to refinance. If you purchased certain kinds of coverage you don't think you need now, you may be able to cancel them and get the balance of the money back. If those options don't work in your particular case, you may still be able to lower your monthly car payment.

How to refinance your car loan

Before thinking about refinancing your loan, make sure that you will not incur any penalties for paying off your loan early. The easiest way to find out if you'd be subject to a prepayment penalty is to review your contract or reach out to the lender directly. As a rule, loans that are longer than 61 months are exempt from prepayment charges.

If you're not in a contract that has a prepayment penalty, refinancing a high-interest rate to a lower one can make a big difference in your monthly payment and in the overall cost of the loan. You can refinance a loan balance almost immediately, so there's no need to wait. To illustrate how refinancing from a high interest rate to a lower one can save you some money, here are a few examples:

Steps for refinancing your auto loan

1. Determine how much money you owe on your car loan. If you make your monthly payment online, you can likely get the payoff amount on the same website. If not, a simple call to your lender should be enough. You'll be given what's called a 10-day payoff. Keep that number handy.
2. Look up your car's value using the Edmunds vehicle appraisal tool. Compare the car's "dealer retail value" to your 10-day payoff. If the payoff is lower than or close to the dealer retail value of the vehicle, you're in good shape. If you owe considerably more than your vehicle's value, refinancing your car may be a challenge unless you have a strong credit history.
3. Check your credit. Many credit card companies offer tools that allow members to check their credit reports and scores online for free. Another free resource is AnnualCreditReport.com. If you want to refinance a car loan with bad credit, you may not get the low rate you're hoping for, so be prepared to shop around for the best rates.
4. Once you've established your credit standing, contact a credit union or bank for an interest rate quote. Sites such as Bankrate.com can help you find competitive auto loan rates based on your approximate credit score and your location.
5. While you're shopping, try to find a company that uses a soft credit pull to give you an approval. (Unlike a hard credit pull, a soft pull will not affect your credit score.) Even if the approval is lower than your current interest rate, don't immediately jump on it. Get quotes from at least three lenders to make sure you get the lowest rate possible.

Undoing insurance and warranties

If you purchased additional items that were installed on your vehicle, such as a theft deterrent system or paint sealant, you probably won't be able to return, cancel or get a refund for those products.

If you regret buying an extended warranty or other coverage, such as gap insurance, a prepaid maintenance plan, or tire and wheel protection for your vehicle, you can cancel the coverage and get a partial refund of your purchase price.

You can cancel optional coverage and insurance by contacting your dealership or the company that provides the service. You should be able to find the name of the company that administers your coverage or insurance on your sales contract.

Depending on the product you're canceling, you may need to provide documentation that has to be filled out in person at the dealership, such as an odometer mileage disclosure that would have to be verified by a dealership employee. You'll need to work with a sales manager or a person from the finance department to complete the cancellation. After the paperwork is completed, it can take a few weeks or months for the money to be refunded to you.

The refunded amount will be reduced from the balance of your car loan, and although the balance reduction won't lower your monthly payment, it will shorten the length of your loan. If, for example, canceling products nets you a refund of $1,000 and you have a monthly payment of $500, the term of your loan would be reduced by two months.

Cancel extras first, then refinance

If you've got both a high interest rate and some after-sales coverage to cancel, the smart move is to cancel the products first. Once your loan balance has been reduced, then work on the refinance. Doing both will reduce your monthly payment now and can potentially net you some significant savings in interest charges down the line too.

Sell your car

If all else fails and you're still wondering what to do if you're in a bad car loan, you could always consider selling your car outright to a dealer or a private party. If you paid too much for the car or you rolled in negative equity and are therefore upside down or underwater on your car loan, you're probably going to have to take a loss on the sale. If that's the case, you'll have to kick in some of your own money to pay off the bad car loan you're trying to get rid of. If you end up choosing to sell your car to get out of a bad car loan, make sure to cancel any of the extras you may have purchased to lower your loan balance before you put it up for sale.