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How to Get Out of a Car Loan

You swear the car was calling your name. You could picture what you’d look like driving it and all the amazing places it would take you. Even when you realized it was out of your price range, you knew you just had to have this car. So, in order to secure your new wheels, you took out a loan. The dealer assured you that you’d have no problem making the monthly payments.

But now the new-car smell is gone, and that car payment is starting to feel like a real thorn in your side. And you’re thinking, How do I get out of this? Hey, car buyer’s remorse is real, even if it’s a car you love. But don’t worry—you can get out of a car loan. We’ll walk you through how to get rid of a car payment once and for all.

How Do Car Loans Work?

Even though almost 86% of new cars are financed, not everyone who takes out a car loan knows how they work.1 And that’s exactly what dealerships and lenders want. Because the less you know, the more money they can get from you.

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But let’s do a quick rundown of the car loan process so you can understand what’s really going on under the hood.

When you finance a car, you’re borrowing money from a lender to “buy” it. The amount you borrow and the agreement to pay back that money over time is the car loan. And your car payment is what you pay each month for the loan.

A car loan is made up of three parts:

  1. Principal: This is the total amount of the loan.
  2. Interest: This is the amount of money your bank or lender tacks on to your car payment each month in exchange for giving you their money.
  3. Term: This is the amount of time you have to pay back the loan.

Sounds simple enough, right? But car salesmen are experts at sweeping the fine print under the rug so it seems like you’re getting a great deal. The truth is, financing a car costs you more in the long run than if you just bought the car with cash.

Not convinced? Go ahead and use the Car Payment Calculator to see just how much extra you’re forking over when you finance a car. And don’t forget: Your car is going down in value the whole time. That means, in a couple years, you’ll have paid way more for a car that’s worth way less.

Can I Return a Car I Financed?

Were you so excited the day you got your new ride, only to realize you bought a car you can’t afford? It’s easy to get googly-eyed over those heated leather seats and catch a case of car fever. But after that first car payment comes out of your bank account, you might wonder if you’ve made a huge mistake. Can you even take it back to the dealership?

Here’s the deal: Returning a car isn’t as easy as returning a sweater that doesn’t fit. Unless a dealer has listed a specific return policy (usually within a certain time frame or under a certain mileage), that car is legally your responsibility.

The only other way you could return a car after you bought it is if your car is a lemon (aka a car with a manufacturing problem). But lemon laws differ by state, and they don’t cover buyer’s remorse. So, that means the moment you drive the car off the lot, you’re responsible for making the payments.

Best Ways to Get Out of a Car Loan

Now that you know what a total waste car payments are, let’s talk about how to get you out of that car loan. Basically, you’ve got two options: Pay off the loan or sell the car. Which one should you do? Well, that comes down to how you answer two questions:

1. Can you be debt-free within two years and keep the car?

If yes, pay off the loan. If not, sell it.

2. Is the total value of all your vehicles (things with a motor in them) more than half of your annual income?

If yes, sell it. If not, pay off the loan.

That’s the quick answer, but let’s break down how each option plays out.

Pay off the loan.

If you can be debt-free within two years and the total value of your vehicles isn’t more than half your income, it’s time to get serious about paying off your car loan. How serious? Serious enough to get on a budget, cut way back on your spending, and maybe even pick up a side hustle. Do whatever you can to throw as much money toward your car loan as possible.

But we’ve got one more question for you: Do you really love your car? Like, love it enough to let it keep you in debt longer? Even if you can pay it off in less than two years, you might want to sell it and get something cheaper for a while. That way, you can make way more progress toward being debt-free. Remember, the sooner you get rid of your debt, the sooner you can start building real wealth!

Sell the car.

If your car payments are tying up your income and keeping you from becoming debt-free in two years, it’s time to get rid of them (aka sell your car). We know this can be painful, and we’re not saying you can’t drive that same car again. But you deserve to be able to own your car, not have your car own you.  

Your first step is to check out Kelley Blue Book to find out how much your car is currently worth. The market for used cars is hot right now, so you might be able to get even more for it. Next, start spreading the word that you’re selling. Try Craigslist, social media sites, word of mouth, etc. Then, once you make the sale, you’ll have enough to pay off the loan and get something in your price range—with cash!

But if you’re upside down on your loan, that’s a different story (one we’ll explain next).

How to Get Out of an Upside-Down Car Loan

If your car loan is worth more than the value of your car, you’ve got an upside-down car loan on your hands. In this case, your best option is to sell the car and cover the difference.

If you don’t have the cash to pay off the remaining amount and get the title from the lender, you’ll need to get an unsecured loan (one that doesn’t require any collateral) for that amount. Yeah, you’ll still have a car loan, but it’ll be way easier to pay off—and you won’t have an underwater car pulling you even deeper in debt. Then you can attack that loan with everything you have until it’s going . . . going . . . gone!

What Not to Do With Your Car Loan

Okay, so now that you know which path to take to get out of your car loan, let’s talk about some options you should avoid. They may be tempting, but trust us, they’ll only leave you worse off.

Refinance Your Current Car Loan

What about trying to negotiate a better car payment? While you might be able to lower your interest rate or get a slightly lower monthly payment by refinancing over a longer term, you’re only addressing a symptom of a much bigger problem. Having a car payment keeps you in debt and paying way more for a car in the long run than you should. Not. Worth. It.

Surrender Your Car

You might think that you can just surrender your car back to the lender (that’s called voluntary repossession) and you’ll be off the hook. But that’s a big mistake. Why? The lender will most likely sell the car at auction for a much lower price than you could get for it if you sold it yourself. And then they’ll sue you for the difference.

It’s a giant mess to deal with and trashes your credit. And while we don’t put much stock in credit scores, there’s a big difference between having no credit score because you don’t borrow money, and ruining your credit because you’ve made some bad decisions with money. Moral of the story? You want to do everything you can to avoid a repossession.

Default on Your Car Loan

You know what comes before having your car repossessed? Defaulting on your car loan. Yeah, it would be nice to just stop making payments on your car, but that doesn’t come without consequences. It’s only a matter of time before the repo man comes knocking at your door—and then you’re stuck with a lawsuit and no car. Listen, if you signed on the dotted line, you’re responsible for making your car payments, and if you have the money, you should pay it.

How to Buy a Car Without a Loan

So, after you ditch the car loan, what do you do about getting another car? Great question. You buy a car with cash! Yep, you heard that right. You pay for the whole thing up front—no loans, no financing, no leasing. Cash. And yes, it’s totally possible! The key is finding a car you can actually afford. Whether you have $3,000 or $13,000 to spend, you need to stick to your budget.

And listen, you don’t have to drive a clunker forever. But if you buy something cheap just to get yourself around, you can save the money you would’ve spent on a car payment and get something a little nicer down the road. That way, you can get where you need to be without hauling around the giant weight of a car payment.

How to Get Rid of Your Car Loan for Good

Cars are the most expensive thing we buy that go down in value. It’s like lighting a match to a pile of money every time you drive down the road! And while there’s nothing wrong with having a car, you don’t 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 isn’t just a pipe dream—it’s totally possible.

If you’re tired of debt holding you back, Financial Peace University (FPU) 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, you’ll learn how to dump your debt for good! 

Don’t let your car loan keep you stuck. It’s time to make progress. Start FPU today!

Ramsey Solutions

About the author

Ramsey Solutions

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 (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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