There are many reasons why you may need to get out of a car loan. These reasons could include needing a new car better suited for your lifestyle, a more fuel-efficient car or maybe your monthly payments are just too high for you to be financially stable. Regardless of your reason for needing to get out of your car loan agreement, there’s usually a way out.
Steps to Take Before Getting Out of a Car Loan
If you find yourself in a situation where you need to get out of your car loan in Canada, you have four main ways of doing this. Depending on your situation, one of these options will be more favorable than the other. Before you make a decision on which option to take, you need to figure out what your car is worth. One of the best ways to find the value of your vehicle is to use Canadian Black Book’s car value tool.
Negative Equity or an “Upside Down” Car Loan
You may find yourself in a loan situation where the amount you owe on the car loan is more than the car’s overall value. So if you decided to sell the car, you still wouldn’t get enough in order to pay off the remainder of the loan. This situation is what’s known as negative equity or an upside down car loan. There are a few different reasons this can happen. First, you may sign a car loan with little to no down payment, meaning you’re getting a loan for almost the full cost of the car. Secondly, you may pay for a bunch of add ons to the vehicle, except these add ons don’t actually increase the value of the vehicle.
Six Ways to Get Out of a Car Loan in Canada
1. Pay off the loan in full. While this would be the most practical way to get out of a car loan, it’s not a position many Canadians have the luxury of being in. If you have the cash available to pay off the car loan early and in full, this gives you the freedom to get out of your loan and take complete ownership of the vehicle.
2. Sell your car privately. If you can manage to sell your car privately for more than the remaining amount left on the loan, you should consider selling privately. This way you’ll be able to get out of your loan without negatively affecting your credit score. Be sure to check out our blog on how to get the most money when selling your car.
3. Transfer your car loan. An alternative option to selling your car privately is to transfer your loan to that person. If you’re able to find someone that is willing to take on your debt, depending on their credit situation, you may be able to work out a new contract with them under the same lender. While this is a great way to get rid of your car loan without negatively affecting your credit score, it won’t be possible if your in an upside down loan.
4. Refinance your car loan. If your main reason for getting out of your car loan is because your monthly payments are too high, you should consider reaching out to your lender about refinancing. If your credit score has increased from the time when you signed the original loan agreement, there’s a chance you’ll be able to renegotiate your loan with a lower interest rate, extend the term, or add a co-signer. For more on car loan refinancing, check out this blog!
5. Trade it into a dealership. If you’re in a situation where you’re struggling to make your monthly payments and are not in negative equity, you should consider trading your vehicle into a dealership for a less expensive vehicle that you can afford to make monthly payments on.
6. Return your vehicle to the lender. While this should be used as a last resort option, if you’re unable to sell your car or obtain refinancing, you may need to consider this. In a car loan, if you continually fail to make payments, your vehicle will be repossessed by the lender. In this case, rather than having the lender come and repossess the vehicle, you're voluntarily giving them the vehicle to be repossessed. The reason you should avoid doing this is because it will hurt your credit score significantly and make getting any loans in the future very difficult.
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