How to Break a Car Loan

By | July 17, 2009

Before trying to answer the question on how to break a car loan, let us first examine the nature of a car loan. This is a kind of personal loan that permits you to pay for the car in installments instead of being required to pay the total selling price all at once. In effect, it would be the bank or lending institution who will pay the total price and in return you will be paying a monthly amount that includes an interest charge.

A car loan may either be a secured loan or an unsecured loan, but usually the lender will offer a secured loan because it is assured that it will be able to recover its money in case you are unable to come up with the monthly payments by simply repossessing your car. An unsecured loan will often have a much higher interest rate and the lender will require a much higher credit score.

Remember that you may be able to get a secured car loan even if you have a bad credit score because of the presence of your car as collateral. You can even take this opportunity to enhance your credit score by ensuring that you are prompt in your monthly payments.

Before you decide on getting a car loan, you must consider your income and your cash flow. If you already have a large amount of debt, you must think twice before getting a car loan. Remember that there will be additional costs when you own a car, such as registration fees, gasoline, taxes, and maintenance. If you could afford a bigger down payment, you might want to consider its advantages because this would reduce the interest rate and would greatly reduce your required monthly payments.

Always remember that if you fail to make a payment, you are putting your car at risk. And even if you have obtained an unsecured loan, the lender can still sue you to recover the amount that you owe and legally seize some of your properties or even your savings in the bank. Moreover, missed payments will be recorded in your credit report and will negatively affect your credit score.

How do you break a car loan?

This may only be possible during the first two weeks after you have signed the contract. Because this is a contract, you may not be able to break the contract without severe penalties and these would depend on the agreement that you have signed. Because there are two parties in a contract, you may want to cancel it but this would not be possible unless the other party agrees to it.

Basically, if you have signed the contract in the lender’s office, you would only be able to cancel it if the lender has not yet signed the agreement. If you took the agreement at home, you have the right to cancel it usually within two weeks, but once you had signed it, returned it, and received the lender’s reply, you only have five days left in which to cancel. After that, you might be required to provide the lender with a pre-payment fee, which is often one to two months of interest.

Your best option would be to sell the car for what you owe on it.

If that does not work, and you are desperate to get rid of the car, sell it for less than what you owe on it, within a reasonable limit, and use the money you get to pay down the loan. Usually the total payoff is less than the “total monthly payments” x “number of payments left” because of interest. You can call your financial institution and ask how much the payoff would be if you gave them a check today, and they would be able to tell you.

You could also ask your lender to perform a “voluntary repossession”  and see if they will take it back. Be careful of any imposed stipulations they may include if an offer is made.  Warning, this will adversely affect your credit.

Sublease your car to a friend, family member or stranger!

Some vehicle loans allow borrowers to sublet or lease their car to another client. This is very popular right now because cars are hard to sell right now and many Americans have such damaged credit that the only way they can lease a vehicles is through some type of private party arrangement like this.

Some people do this legally and some don’t. Meaning they lease out their vehicles and it is unknown to the lender that this was done. If you plan to do this, then be prepared for whatever consequences you may face if they discover your plan.

Be very careful on who you lease to because in most cases these people have little to loose if they break the contract. Most often, whatever the consequences, they will be on you and your credit.

Once the contract is transferred, the hefty weight of the contract is no longer resting on your shoulders but, sellers beware, read the fine print before subletting the lease to avoid being stuck with hidden charges.

Negotiate a car loan modification!

Although it might seem like terms and conditions are non-negotiable, try anyway. If you come to the table with strong knowledge of your lease, hard-headed reasoning and solid negotiation skills, there is always the chance of changing the contract or, in some cases, breaking the lease with little to no penalty.

In the end, many people choose to break or “bust their lease” and pay the penalty. Consider the above as options to avoid losing any more money.

2 thoughts on “How to Break a Car Loan

  1. RAMESH GOVANDE

    I Want to make the payment of my car loan which i taken in NOV.2005 from icici bank i want to pay the due amount my loan account no. is LABRD00004889666

      (Quote)  (Reply)

  2. Jennifer

    I have missed about 3 months of car loan while we were in the process of chapter 7. We’ll be discharged the last week of August. We’re leaving for greener pastures overseas so won;t really need the car. Because of the bk, would my lender be more apt to accept a voluntary repossession? And what are the examples of ‘stipulations’ the lender would make in this case? I am not concerned about our credit score right now because, as you can imagine,, it’s in the bottom already anyway.

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