Getting out of a car loan can seem daunting, but there are several strategies you can use to manage or eliminate your debt. This guide covers practical methods to help you navigate your way out of a car loan effectively. We’ll cover everything from selling your car, to paying it off.
Before we get started, here’s a quick video from CBC that talks about how to avoid long-term car loan debt:
1. Make a Lump-Sum Payment
One of the quickest ways to get out of your car loan is by making a lump-sum payment. This approach allows you to pay off the entire balance of the loan at once, freeing you from future payments and interest.
Advantages:
- Immediate debt relief
- Savings on interest over the life of the loan
Considerations:
- Requires significant upfront cash
- May involve prepayment penalties (check your loan terms)
Steps:
- Calculate Your Payoff Amount: Contact your lender to find out the exact payoff amount, which includes the remaining principal and any interest accrued.
- Review Loan Terms: Check for any prepayment penalties that might apply.
- Gather Funds: Ensure you have the necessary funds to cover the lump-sum payment.
- Make the Payment: Submit the payment according to your lender’s instructions.
Example: If you owe $10,000 on your car loan with an interest rate of 5%, paying it off now can save you hundreds of dollars in interest.
2. Refinance
Refinancing your car loan involves taking out a new loan with better terms to pay off the existing one. This can lower your monthly payments or reduce the interest rate.
Advantages:
- Lower monthly payments
- Potentially lower interest rates
Considerations:
- Requires a good credit score
- May extend the loan term, increasing total interest paid over time
Steps:
- Check Your Credit Score: Ensure your credit score is good enough to qualify for better loan terms.
- Shop Around for Rates: Compare rates from different lenders, including banks, credit unions, and online lenders.
- Calculate Savings: Use a loan calculator to see how much you would save with a new loan.
- Apply for Refinancing: Submit your application to the lender with the best terms.
- Complete the Process: Once approved, your new lender will pay off your existing loan, and you’ll start making payments to the new lender.
Example: Refinancing a $15,000 loan from 6% interest to 4% can save you about $300 annually in interest.
3. Trade-In
Trading in your car to a dealership can help you pay off the loan. The dealer appraises your vehicle and offers to buy it, using the trade-in value to pay down your loan balance.
Advantages:
- Simplifies the process of getting a new car
- Immediate relief from your current loan
- Save tax (learn more in our article to car sales & taxes)
Considerations:
- Trade-in value may be lower than selling privately
- You may still owe money if the trade-in value is less than the loan balance
Steps:
- Assess Your Car’s Value: Use resources like Kelley Blue Book or Edmunds to estimate your car’s trade-in value.
- Visit Multiple Dealerships: Get trade-in offers from several dealerships to ensure you get the best deal.
- Negotiate the Trade-In Value: Don’t accept the first offer. Use your research to negotiate a better price.
- Review the Loan Balance: Ensure the trade-in value covers your loan balance or understand how much you’ll need to pay out of pocket.
- Finalize the Trade-In: Complete the necessary paperwork to transfer ownership and apply the trade-in value to your loan.
Example: If your car is worth $12,000 but you owe $13,000, the dealer pays $12,000, and you need to cover the remaining $1,000.
4. Sell Your Car Privately
Selling your car privately can often yield a higher price than trading it in, checkout our examples from Ontario. This can help you pay off the loan more effectively.
Advantages:
- Higher sale price compared to trade-in
- More control over the sale process
Considerations:
- Requires time and effort to find a buyer
- You remain responsible for loan payments until the car is sold
Steps:
- Research Your Car’s Value: Use resources like the Canadian Black Book to determine your car’s market value.
- Check Comparable Listings: Look at similar cars for sale on platforms like Kijiji, Craigslist, and Facebook Marketplace to set a competitive price.
- Prepare Your Car for Sale: Clean your car thoroughly and take high-quality photos. Gather all maintenance records.
- Create a Listing: Use free listing resources like Kijiji, Craigslist, and Facebook Marketplace. Write a detailed description including key features, mileage, and condition.
- Manage Inquiries: Respond promptly to potential buyers and be prepared to answer questions and arrange test drives.
- Negotiate the Sale: Be open to negotiation but have a minimum price in mind.
- Complete the Sale: Once you agree on a price, complete the necessary paperwork to transfer ownership and pay off your loan.
Example: Selling your car for $14,000 privately when the dealership offers $12,000 can give you an extra $2,000 to pay off your loan.
There are ways to exit your car loan
Getting out of a car loan involves evaluating your financial situation and choosing the best strategy for you. Whether you make a lump-sum payment, refinance, trade-in, or sell privately, each method has its own set of benefits and considerations. Make sure to assess your options carefully to find the most suitable solution for your needs.