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Getting Out Of a Car Loan

Getting Out Of a Car Loan

Getting out of a car loan in Canada can be a challenging process, but is possible through various options. When you finance a vehicle, you agree to make monthly payments over a set term until the amount borrowed plus interest is repaid in full. However, life circumstances or financial hardship can make continuing with the loan obligation difficult or impossible.


While simply stopping payments leads to repossession and severe credit damage, proactively evaluating your choices provides a route to exiting the loan properly. This guide will examine multiple methods to release you from an auto loan commitment in Canada with the least financial impact.


When seeking to end your auto loan early, you want to minimize fees and credit score harm while gaining freedom from ongoing payments. Refinancing, selling the car, voluntary repossession, loan term extension, and utilizing home equity are all potential solutions covered here. Understanding the pros and cons of each approach allows you to make an informed decision to get out of your car loan.

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Understand Your Car Loan

Before deciding how to get out of your car loan, it’s important to fully understand the details of your existing auto loan agreement. This includes reviewing the original loan amount, interest rate, monthly payments, loan term length, and payoff balance. You can find all of this information by logging into your lender’s website or calling their customer service line.

Knowing the total outstanding balance and interest rate gives you an idea of how much it will cost to pay off the loan. Compare the remaining term length to how long you’ve already been paying – this shows if you’re closer to the beginning or end of repayment. It’s also useful to calculate the monthly interest being charged based on the rate. This helps you estimate potential savings from refinancing to a lower rate.

In addition to the hard numbers, think about what led you to seek options for exiting the loan. Was it due to unaffordable payments? Did you realize after purchase that the car no longer fits your needs? Understanding the “why” behind your decision can help narrow down the best path forward.

With all the loan specifics and your motivations identified upfront, you’ll be better informed to weigh the pros and cons of alternatives like refinancing, voluntary repossession, or selling the car. The goal is choosing the right solution to relieve you of an unwanted auto loan commitment.

 

Refinancing Your Auto Loan

Refinancing your auto loan is one of the most common ways to get out of your current car loan. When you refinance, you take out a new loan to pay off the existing one. This can help in a few key ways:

 

Lower Interest Rates

If you originally got your car loan when you had lower credit, refinancing after improving your credit score can qualify you for a much lower interest rate. This reduces the total interest paid over the life of the loan and lowers your monthly payments.

 

Extend Loan Term

Many people choose to refinance into a longer loan term, like going from a 5-year to a 6-year loan. This spreads the loan balance over more months, so it lowers the required monthly payment. Just be aware this also increases the total interest paid over the full loan.

 

Closing Costs

Refinancing a car loan isn’t free. You’ll typically have to pay fees like application fees, title transfer fees, registration costs, etc. These closing costs are usually several hundred dollars. Make sure to weigh them vs. the interest savings when deciding if refinancing makes sense.

 

Overall, refinancing can be a great option if your credit score has improved significantly since you first got the loan or if extending the term would provide needed monthly cash flow relief. Just be sure to shop around for the best rates and calculate the costs vs. savings.

 

Renegotiating Your Loan Terms

If your financial situation has changed since you first took out the auto loan, you may be able to negotiate with the lender to modify the terms and make the payments more manageable. This involves contacting the lender directly and requesting an adjustment to either extend the repayment term or reduce the interest rate.

To get the lender to agree to revised terms, you’ll likely need to provide documentation to prove financial hardship. This could include pay stubs showing reduced income, medical bills, or other evidence that your finances can’t support the original agreed upon payments. Be prepared to explain specifically how much you can afford to pay each month.

The success of renegotiating with the lender depends largely on their policies and your history as a borrower. If you have been consistently making on-time payments, they may be willing to work with you to avoid default. However, if your credit is poor or payments are already behind, the lender has less incentive to lower costs.

Before pursuing this option, be sure to calculate how much longer you’ll be paying off the loan if the term is extended. While it lowers the monthly payment, you end up paying more interest over the life of the loan. Carefully consider whether reduced payments now are worth higher overall costs.

 

Voluntary Repossession

Voluntary repossession, also known as voluntary surrender, is when you voluntarily hand over your financed vehicle to the lender. This allows you to return the vehicle and get out of the remaining loan payments. However, there are significant downsides to voluntary repossession that you need to consider.

The main consequence of voluntary repossession is severe damage to your credit score. When you surrender the vehicle, the lender will report it to the credit bureaus as a repossession. This can cause your credit score to drop by over 100 points. The repossession will stay on your credit report for 7 years and make it very difficult to qualify for future loans or credit.

In addition to credit damage, you will likely owe the lender money even after the repossession. This is because vehicles depreciate rapidly and most loans are underwater for the first few years. If your loan balance is higher than the car’s current value, you will owe the lender the difference after they sell the repossessed vehicle.

Before choosing voluntary repossession, carefully consider the impact to your credit and potential remaining loan balance. Weigh these negatives against the benefit of being released from the monthly payments.

 

Selling the Car

One of the most direct ways to get out of your car loan is to sell your vehicle. If you can find a buyer willing to pay at least the amount you still owe on the loan, you can use the sale proceeds to pay off the lender and release the lien on the car.

Selling privately tends to yield the highest potential price for your car. You’ll need to advertise it for sale online or in your local community. Be prepared to handle test drives, negotiations, paperwork, and the sale funds. Price your car competitively based on its year, mileage, condition, and options.

Trading it in at a dealership can be more convenient but will likely result in a lower sale price. The dealer will appraise your vehicle and make you an offer, then apply the trade-in value towards your new car purchase. This route is quick and simple, but gives up some control over maximizing your car’s resale value.

In either case, be sure to get a payoff quote from your lender so you know exactly how much is still owed. Then target a sale price that covers the payoff amount plus any other costs like taxes and DMV fees. This will allow you to pay off the loan and get the title transferred to the new owner.

 

Paying Off the Remainder

If you have enough available cash to cover the entire outstanding loan balance, paying it off in full is often the quickest way to get out of your auto loan while still keeping the vehicle.

This path allows you to exit the loan obligation in a relatively short timeframe without having to go through credit-damaging options like voluntary repossession or refinancing. You don’t have to rely on finding a buyer for the car at an acceptable price either.

The key requirements are having access to a lump sum amount equal to the remaining principal on the loan and being willing to continue owning the car for the foreseeable future. While not everyone has this much spare cash on hand, paying off the balance completely may be feasible if you receive a windfall like an inheritance or bonus.

Before choosing this route, run the numbers to determine the total payoff figure so you know precisely how much money you’ll require. Check for any prepayment penalties from your lender as well, though these are rare for auto loans. Overall, if the capital is available, satisfying the entire remaining balance lets you keep the vehicle while promptly releasing you from the loan.

 

Getting Out of an Upside Down Car Loan

An upside down car loan is when you owe more on the loan than the car is worth. This typically happens because vehicles depreciate quickly, especially in the first few years. You may have also rolled negative equity from a previous auto loan into the new one, increasing the balance. When you want to get out of an upside down car loan, you have a few options:

 

Refinancing an Underwater Loan

One method is trying to refinance the upside down loan. This involves taking out a new loan to pay off the existing one. For refinancing to work, you’ll need to find a lender willing to approve you for more than the car’s current value. Having good credit and steady income makes it more likely to qualify. Refinancing stretches the loan term back out, which lowers the monthly payment on the same principal amount. You can also try to get a lower interest rate to save money.

 

Using Gap Insurance

If you purchased gap insurance when originally financing the vehicle, this coverage helps pay the difference between the car’s value and loan amount. Gap insurance protects you if the vehicle is totaled or stolen. However, voluntary repossession usually doesn’t trigger a payout from gap coverage. Review your policy details to understand exactly which situations qualify for reimbursement.

 

Tax Implications

When getting out of a car loan, it’s important to consider the potential tax implications of your chosen path. If your auto lender forgives part of your remaining loan balance, the amount forgiven may be considered taxable income by the IRS. For example, if you had $10,000 left on your loan and the lender agreed to accept $8,000 as payment in full, that $2,000 in forgiven debt could be added to your taxable income for the year.

Similarly, if you sell your car for less than you owe on the loan, the difference may count as taxable income unless you qualify for certain exemptions. On the other hand, if you sell the car for more than you owe, you may have to pay capital gains tax on any profit from the sale. The capital gain would be the difference between the sale price and your adjusted cost basis, which factors in depreciation.

Consulting a tax professional can help you understand the potential tax consequences when getting out of an auto loan. With proper planning, you may be able to reduce or defer taxes related to debt forgiveness or the sale of a vehicle.

 

Impact on Credit Score

Getting out of a car loan has consequences when it comes to your credit score. The impact depends on whether you voluntarily surrender the vehicle or go into default from missed payments. With voluntary repossession, you work directly with the lender to return the car before payments are past due. This is still noted on your credit report, but doesn’t damage your score as severely as defaulting on the loan.

According to credit experts, a voluntary repossession typically causes a credit score drop between 130 to 160 points. It remains on your credit report for 7 years. In contrast, defaulting from missed payments can lower your score between 220 to 240 points. It also stays on your report for 7 years.

After the initial drop, your credit score will start to recover over time as long as you maintain responsible credit habits. Most people can rebuild their credit score to over 700 within 18 to 24 months after voluntary repossession. But it takes longer to bounce back from the deeper impact of an involuntary repossession after loan default.

The most important step is continuing to make payments on time for any other credit accounts you still have open. You also need to avoid taking on additional debt right after surrendering your vehicle. Opening new credit too soon makes lenders view you as a higher risk, further delaying your credit score recovery.

 

Alternatives to Surrendering Vehicle

Before deciding to voluntarily surrender your vehicle, it’s important to consider all alternatives that may allow you to keep your car. Here are a few options to explore:

 

Loan Modification

Contact your lender to see if they can modify the terms of your loan to make it more affordable. This may involve extending the repayment term to lower the monthly payments or reducing the interest rate. To qualify, you’ll likely need to show financial hardship. The lender wants to help you keep making payments, so it’s in their interest to work with borrowers struggling to make payments.

 

Credit Counseling

A nonprofit credit counseling agency can provide guidance on managing your debts and budget. They may be able to negotiate with your lender to reduce or defer payments. Credit counseling can help you get your finances back on track without having to surrender the vehicle.

 

Bankruptcy

Filing for Chapter 7 or Chapter 13 bankruptcy stops collections and wipes out certain debts. However, you’ll have to repay at least part of the auto loan debt to keep the vehicle. Bankruptcy damages your credit but may allow you to keep the car while eliminating other debts.

Before taking drastic measures like voluntary repossession or bankruptcy, be sure to fully explore options like loan modifications and credit counseling. They provide alternatives that may help you keep your vehicle while getting your finances back on track.

 

Avoiding Upside Down Loans

One of the best ways to avoid ending up with an upside down auto loan is to make a sizable down payment when you first purchase the vehicle. Experts recommend putting down at least 20% if you can. This larger down payment reduces the amount you have to finance, lowering the risk of the loan balance later exceeding the car’s value.

Purchasing gap insurance is another smart move to avoid upside down situations. This optional coverage helps pay the difference between what your vehicle insurance covers if it’s totaled and what you still owe on the loan. Gap insurance protects you if the car is worth less than the remaining loan balance.

Opting for a shorter loan term can also help avoid upside down loans. The quicker you can pay down the principal, the less likely it is for depreciation to make the car worth less than what you owe. Aim for a 3 year loan if possible instead of 5-6 years.

Being proactive upfront by putting more money down, getting gap coverage, and shortening the repayment timeline makes it much less likely you’ll end up trapped in an upside down car loan further down the road.

 

Qualifying for Refinancing

To qualify for an auto loan refinance, lenders will evaluate your credit score, income, and loan-to-value ratio. Having a strong application in these areas will help ensure you get approved for the new loan.

 

Credit Score

Your credit score gives lenders an idea of how reliably you have repaid debts in the past. To get approved for a refinance, you’ll generally need a credit score of at least 650, with 720 or higher considered excellent. The higher your credit score, the more likely you are to qualify for the best refinance rates. If your credit score has improved significantly since you took out your original loan, refinancing could help you lock in a much lower interest rate.

 

Income Requirements

Lenders want to see you have enough income to comfortably make the monthly payments. Expect to provide documents like pay stubs, tax returns, or profit and loss statements to verify your income. Make sure your debt-to-income ratio is low, meaning your total monthly debt payments take up no more than 36% of your gross monthly income. Keeping housing costs, credit card balances, and other debts low will help satisfy the lender’s income requirements.

 

Loan-to-Value Ratio

The loan-to-value ratio compares how much you owe on the loan to how much the car is currently worth. Lenders generally prefer this ratio be no higher than 125%, meaning you owe no more than 25% above the car’s value. Having equity in the vehicle makes it less risky for the lender. If you owe significantly more than the car is worth, improving the loan-to-value ratio by paying down the balance first can help your chances of refinancing approval.

 

Using Home Equity to Pay Off Car Loan

If you have sufficient equity in your home, you may be able to leverage it to pay off your auto loan. There are two main options for tapping into home equity:

 

HELOC

A home equity line of credit (HELOC) allows you to borrow against the equity in your home. It works similarly to a credit card, where you have a set limit that you can draw from as needed. The interest rates are variable, meaning they can fluctuate over time. This can be a flexible way to access funds to pay off a car loan, but make sure you understand the risks.

 

Cash-Out Refinance

With a cash-out mortgage refinance, you take out a new mortgage for more than what you currently owe, allowing you to pocket the difference in cash. This converts your home equity into spendable funds you can use to pay off the auto loan balance. The risk is you are taking on more mortgage debt and extending the payoff timeline.

 

Risks

Before tapping home equity to pay off a car, consider the risks carefully. You are putting your home as collateral for the debt, which is riskier than an auto loan. Make sure you can afford the monthly payments, as failure to repay could put your home in jeopardy. Consult with a financial advisor to ensure this strategy aligns with your overall financial goals.

 

Conclusion

Getting out of a car loan can be a challenging process, but understanding all of your options is the first step. Refinancing, renegotiating terms, voluntary repossession, and selling the vehicle are all potential ways to release yourself from the financial commitment of an auto loan.

When weighing these choices, be sure to evaluate the pros and cons for your unique situation. Factors like your credit score, income level, loan balance, and more will impact which strategies are viable. For example, voluntary repossession makes sense when a borrower is severely underwater on their loan, while refinancing works best for those with strong credit.

No matter what path you take, be prepared for some consequences whether that’s damaged credit, tax implications, or fees. However, finding the right approach can minimize the downsides and help you move forward. With patience and careful planning, you can develop a personalized plan to exit your car loan successfully.

The bottom line is not to feel trapped or hopeless if your auto financing has become unmanageable. There are always options, and understanding them puts you back in control. Use the knowledge in this guide to make informed choices that benefit you financially and move you toward your goals.

 

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Questions About Getting Out Of a Car Loan

There are several options for getting out of a car loan in Canada, including paying off the loan, refinancing the loan, selling the vehicle, voluntary repossession, and bankruptcy or consumer proposal. Paying off the loan is the cleanest method, but can be challenging if you owe more than the car is worth or can’t afford the payments. Refinancing may lower your payments but extends your loan term. Selling the vehicle or voluntary repossession can work if you owe less than the car is worth. Bankruptcy or consumer proposal clear your debts, but severely hurt your credit.

Yes, you may be able to negotiate with your auto loan lender in Canada. Contact your lender as soon as possible and explain your financial situation. Ask if they can lower your interest rate or extend your repayment term to reduce your monthly payments. Be prepared to provide details on your income, expenses, and inability to make the payments. If approved, get any agreement with new terms in writing. This option won’t work if you’re too far behind on payments.



The pros of refinancing your car loan are you may be able to get a lower interest rate to reduce your payments, switch from a variable to fixed rate loan for stability, or extend the repayment term to lower your monthly dues. The cons are that you’ll pay more interest over the life of the new longer loan, may need to meet credit score or other requirements to qualify, and refinancing itself may incur fees. Do the math to see if refinancing makes sense for your situation.



Yes, typically you will still owe money if you voluntarily surrender your financed vehicle back to the lender in Canada. This process is essentially a voluntary repossession. The lender will sell the vehicle and apply the sale proceeds to your outstanding loan balance. However, because vehicles depreciate quickly, you will usually owe the difference between the sale proceeds and what you originally financed plus fees and interest.

Voluntary repossession of your vehicle when you can no longer afford payments will negatively impact your credit score in Canada. Defaulting on any loan damages your credit. Voluntary repossession will likely lower your score between 130 to 150 points and show on your credit report for 6 to 7 years. This will make it very difficult to qualify for financing including loans or mortgages during this period.

When you voluntarily repossess or surrender your financed vehicle in Canada, there are often fees charged by the lender on top of your loan balance. Fees can include storage fees as the car sits on the lot waiting for auction, fees related to loss of value and depreciation, auction or transportation fees, administrative or legal fees, and continuing interest or finance charges until the car is sold. Make sure you understand all fees so you know the total owed.



Yes, Canadian dealerships often allow customers with negative equity or an “upside down” car loan to trade in their existing vehicle towards a new car purchase. This means you owe more on the trade-in than it’s current value. That negative equity is rolled into the financing on your next vehicle. While convenient, this increases total owed and payments on the new car significantly. Shop interest rates carefully if trading in an upside down car.



Selling your car privately instead of trading it in typically yields more money, allowing you to pay off more of your auto loan and ideally all of it. However it takes more time and effort. Dealerships offer convenience but give less for trade-ins. Compare offers and calculate exactly how much you’d need to pay off your loan after selling privately or trading in to make the best choice. If in a rush, trading in may work better.

If you owe more on your car than it’s current resale value, meaning you have negative equity or are “upside down” on the loan, you may still qualify to refinance in Canada. Lenders will consider factors like your income, debts, credit score and history in making a decision. A co-signer with better credit may help you qualify as well. Refinancing an upside down car loan can get you a better rate and lower payment potentially.

If you have high interest rate debt in addition to an unaffordable car loan, combining everything into one debt consolidation loan at a lower interest rate can potentially save you money each month. Balance transfer credit cards are another consolidation method. Consider all factors including fees, loan term, early repayment policy, and impact on credit score before pursuing debt consolidation to deal with your auto loan.



Declaring bankruptcy in Canada can eliminate some types of unsecured debt, but an auto loan is usually a secured debt meaning the vehicle is pledged as collateral for the loan. This means even after a bankruptcy, the lender can seize your car to satisfy the loan. So bankruptcy usually does not discharge car loan obligations. Voluntary repossession or surrendering the vehicle is often a better route.

No, it’s an extremely bad idea to stop making payments on a financed vehicle without proactively addressing the situation with your auto loan lender. Missed payments will incur late fees, drastically damage your credit standing, and likely result in the lender repossessing your car anyway plus charging additional fees in the process. Explore options like those above before considering ceasing payments.

Co-signing an auto loan essentially means you become equally responsible for repaying the debt if the primary borrower stops making payments. This impacts your credit score and history. If the other person defaults, you must make payments or have your own creditworthiness destroyed plus get calls from debt collectors constantly. Only co-sign an auto loan for someone with proven financial responsibility. Know the risks before you sign.

Most Canadian auto loan lenders impose a mandatory minimum holding period, often between 90 to 180 days, before allowing a financed vehicle to be traded in. This prevents “flipping” cars quickly just to generate dealer kickbacks. Attempting to trade in your car before the mandatory holding period ends will require paying off the existing loan first or incurring expensive early repayment penalties.

No unfortunately once you have signed an auto loan financing agreement and taken possession of the vehicle, you cannot simply return the car nor back out or reverse the loan contract. The lender paid the dealership for your purchase when you drove it off the lot. Even immediately returning the car means you would now owe the loan balance to that lender. Instead consider options like selling or voluntary repossession.



Before trading in an upside down leased vehicle where you owe more than it’s value, understand that excess negative equity will carry over to increase the price, down payment, and payments on your next financed car. This is on top of any applicable lease termination fees. Consider all costs of trading in an upside down lease before deciding and beware of dealers using confusing language about amounts owed.

There are currently no specific car loan forgiveness programs offered by the Canadian government. Some lenders may offer hardship assistance or forgiveness options under certain circumstances, usually for members of the military. Outside of those exceptions, auto loans are legal contracts requiring repayment as agreed, so loan forgiveness is very rare. Instead consider options like refinancing, selling the car, or voluntary repossession.

The risks are severe if you cosigned on someone’s car loan and they stop making payments. As a co-borrower you share equal legal financial liability. The delinquent loan will severely damage your credit standing with a major missed payment on your history. It could also result in debt collection harassment and potential wage garnishment or legal judgements against you personally for the unpaid balance. Avoid co-signing unless you can afford payments.

If your financed vehicle qualifies under provincial lemon laws in Canada because it has serious defects that the manufacturer can’t permanently fix after several repair attempts, you may qualify for a replacement vehicle or full purchase price refund including loan payoff. Strict lemon law criteria and documentation of repair attempts applies. Consult a lemon law attorney to determine if your car qualifies before stopping payments.

If you find yourself “upside down” on an auto loan owing more than your vehicle’s trade-in value, you can continue making payments until you have positive equity, make extra payments to pay down the loan quicker, refinance potentially, or voluntary repossess the vehicle knowing deficiency balances often apply. There’s no easy way out of an upside down car loan unfortunately besides ultimately paying the difference.

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