How to get out of a bad car loan

You might be wondering if there’s any way you can keep your car but pay less each month. The answer is: it depends. 

|
PRNewsFoto/FCA US LLC
The 2017 Chrysler Pacifica.

Making your payment month after month has become such a drag that it eventually occurs to you: “Is there any way I can get out of this loan?”

First of all, what is a bad car loan? The simplest answer is that it’s one you can’t afford or one where you’re paying more than you have to.

You might be wondering if there’s any way you can keep your car but pay less each month. The answer is, it depends. To explain further, let’s take a quick look at your loan.

Your car payment is made up of three main parts:

  • Principal: The balance of the loan, which is the price you paid for the car.
  • Interest: What the bank or lender charges for loaning you the money.
  • Term: The amount of time you have to repay the loan.

Of these three parts, the interest and the term can be adjusted to reduce your monthly payment. To do that, you need to create a new car loan, a process called refinancing.

Review your car loan

To see if refinancing will work for you, begin by finding your sales contract or payment stub. Now, find the interest rate you’re being charged and the term, or the number of months remaining on the loan.

If you prefer, you can simply call your bank or lender, give them your loan number and ask for this information. They’ll also tell you the remaining balance of your current loan, which you’ll need soon.

Once you have found the current interest rate you’re paying, you can check your credit score to see what rate you could now qualify for. To get the current interest rate you qualify for, contact several lenders for a quote. If you can get a lower interest rate, you’ll be able to lower your monthly car payment.

Run the numbers

To see how much money you can save by refinancing, you can use the NerdWallet auto loan calculator to calculate your monthly payment at the new, lower interest rate. At first, don’t change the number of months left to pay off your loan. Remember, this is the number of months you have remaining on your loan, not the full length of the loan from the beginning.

If lowering the interest rate doesn’t reduce your payment enough, you can consider extending the number of months in your new loan. However, it’s best not to spread the loan over too much time since you’ll then pay more total interest. Also, if you take too long to pay off your loan, you run the risk of being “upside down,” meaning you owe more for the car than it’s worth.

When not to refinance

If your credit hasn’t improved, you won’t qualify for a better interest rate. If you’re close to the end of your loan, the savings might not be worth the time to go through the process. True, you can still change the length of the loan if necessary. But that’s a last-resort option.

It’s also important to make sure there are no prepayment penalty fees in your current loan contract. Most car loans have no such charges, so you should be good to go.

Other options

There are other ways for you to deal with a bad car loan, although these options might not be as attractive as refinancing.

Sell your car to a private party: Advertise the car for sale and tell prospective buyers there’s still a loan on it. Once you find a buyer, call your lender and ask how to arrange the transfer. The new buyer will pay off the loan, and any remaining money will be cash in your pocket — or a down payment for your next car.

Sell your car to CarMax: A quick exit route is to take your vehicle to CarMax. They will appraise your car and give you a solid, no-haggle offer to buy it on the spot. Hopefully, the offer will be more than what you owe on the car. If you accept the offer, CarMax will pay off the loan and give you a check for the difference.

Skip payments: Call your lender and explain that you’re having a hard time making ends meet. Sometimes, the lender will allow you to skip one or more payments to help you avoid defaulting on the loan. Save the money from these missed payments and use it to meet your future payments.

Downsize at the dealership: You can trade your car in for a less expensive used car. But beware: Dealers can seem to work financial magic but actually are rolling your balance into a longer loan. Before you attempt this, know the trade-in value of your current car and the value of the car you want to buy. Review the contract carefully before you sign, and run the numbers through a calculator to make sure they add up.

Moving forward

If you apply for a new loan and you think you can qualify for a lower interest rate, it’s time to apply to refinance your car loan. Set aside an hour to fill out applications and another hour to review any offers you get. Keep in mind that reducing your monthly payment by even $25 a month will save you $300 a year. Not only that, but you’ll have the peace of mind of knowing you got the best deal possible.

Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: preed@nerdwallet.com.

This story originally appeared on NerdWallet.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to How to get out of a bad car loan
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2016/1011/How-to-get-out-of-a-bad-car-loan
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe