How to Get Out of a Bad Car Loan

It's a terrible feeling to realize that your car deal is a bad one, marked by a car loan with a high interest rate and laden with extra warranties you didn't really need. People stuck in bad car deals often assume that since the contract has been signed and the car is in their driveway, nothing can be done to make things better. That isn't necessarily true. Fixing aspects of a bad deal isn't impossible. In some cases it can be done months or even years after you've bought the vehicle.

What Is a Bad Car Deal?

Although many elements combine to make up a car purchase, when somebody says they've gotten a bad deal, they are likely referring to one of these four situations:

1. The selling price of the new car was too high.
2. The trade-in amount was too low.
3. The car loan has an annual percentage rate (APR) that's too high.
4. The extras you bought in the finance department were too expensive, unnecessary or both.

Can You Back Out of a Car Loan After Signing?

If you're unhappy with the sale price of your new car, or think you got too little for your trade-in, chances are you won't be able to alter those terms after the deal has been signed. If you signed the sales contract, you own the car.

But if you're unhappy with your car loan, you may be able to refinance. If you purchased certain kinds of coverage you don't think you need now, you may be able to cancel them and get the balance of the money back.

How to Refinance Your Car Loan

Before thinking about refinancing your loan, make sure that you will not incur any penalties for paying off your loan early. The easiest way to find out if you'd be subject to a prepayment penalty is to review your contract or reach out to the lender directly. As a rule, loans that are longer than 61 months are exempt from prepayment charges.

If you're not in a contract that has a prepayment penalty, refinancing a high interest rate to a lower one can make a big difference in a monthly payment and in the overall cost of the loan. You can refinance a loan balance almost immediately, so there's no need to wait. To illustrate how refinancing from a high interest rate to a lower one can save you some money, here are a few examples:

Steps for Refinancing Your Auto Loan

1. Determine how much money you owe on your car loan. If you make your monthly payment online, you can likely get the payoff amount on the same website. If not, a simple call to your lender should be enough. You'll be given what's called a 10-day payoff. Keep that number handy.




2. Look up your car's value, using the Edmunds vehicle appraisal tool. Compare the car's "dealer retail value" to your 10-day payoff. If the payoff is lower than or close to the dealer retail value of the vehicle, you're in good shape. If you owe considerably more than your vehicle's value, refinancing your car may be a challenge unless you have a strong credit history.




3. Check your credit. Many credit card companies offer tools that allow members to check their credit reports and scores online for free. Another free resource is AnnualCreditReport.com.




4. Once you've got an idea of your credit standing, contact a credit union or bank to get an interest rate quote. Sites such as Bankrate.com can help you find competitive auto loan rates based on your approximate credit score and your location.




5. While you're shopping, try to find a company that uses a soft credit pull to give you an approval. (Unlike a hard credit pull, a soft pull will not affect your credit score.) Even if the approval is lower than your current interest rate, don't immediately jump on it. Get quotes from at least three different lenders to make sure you get the lowest rate possible.

Undoing Insurance and Warranties

If you purchased additional items that were installed on your vehicle, such as a theft deterrent system or paint sealant, you probably won't be able to return, cancel or get a refund for those products.

If you regret buying an extended warranty or other coverage, such as gap insurance, a prepaid maintenance plan, or tire and wheel protection for your vehicle, it is possible to cancel the coverage and get a partial refund of your purchase price.

You can cancel optional coverage and insurance by contacting your dealership or the company that provides the service. You should be able to find the name of the company that administers your coverage or insurance on your sales contract.

Depending on the product you're canceling, you may need to provide documentation that has to be filled out in person at the dealership, such as an odometer mileage disclosure that would have to be verified by a dealership employee. You'll need to work with a sales manager or a person from the finance department to complete the cancellation. After the paperwork is completed, it can take a few weeks or months for the money to be refunded to you.

The refunded amount will be reduced from the balance of your car loan, and although the balance reduction won't lower your monthly payment, it will shorten the length of your loan. If, for example, canceling products nets you a refund of $1,000 and you have a monthly payment of $500, the term of your loan would be reduced by two months.

Cancel Extras First, Then Refinance

If you've got both a high interest rate and some after-sales coverages to cancel, the smart move is to cancel the products first. Once your loan balance has been reduced, then work on the refinance. Doing both will reduce your monthly payment now and can potentially net you some significant savings in interest charges down the line, too.