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Life changes can be rapid and unpredictable. Whether you’re expecting a new member in your family, seeking a more eco-friendly vehicle, or facing unforeseen financial challenges, there could be numerous reasons to consider an exit strategy for your current auto loan. Navigating this process can be complex, but with the right guidance, you can come out on the other side with minimal impact on your finances and credit score.

Understanding the Concept of an ‘Upside Down’ Auto Loan

If you owe more on your auto loan than the car’s current value, you’re facing negative equity or an “upside down” auto loan. This can happen if you’ve purchased a car with minimal or no down payment, or if you’ve paid over the odds for your vehicle or selected extras that don’t necessarily enhance its value.

While being upside down can balance out over time, it becomes problematic if you need to sell the car at this point. This is because selling would not generate enough funds to cover the remaining loan balance. But worry not, we have compiled a list of strategies to help you manage this situation without damaging your credit score:

  • Determine your car’s current market value.
  • Sell your car.
  • Transfer your auto loan.
  • Refinance your auto loan.
  • Consider voluntary surrender of your car to your lender.
  • Engage in open conversation with your lender.

Assessing Your Car’s Current Market Value

Unlike real estate, vehicles depreciate in value over time. New cars, in particular, can depreciate by several thousand dollars as soon as they leave the dealership. Hence, it’s crucial to assess your car’s current market value before making any decisions regarding your loan.

Selling Your Car

If your car’s current value is higher than the remaining loan amount, selling it could be a viable option. This way, you can use the proceeds to pay off your auto loan in full, thus protecting your credit score. However, remember to consult your lender if you choose this path, as they might have specific requirements for loan closure.

Transferring Your Auto Loan

Transferring your loan to another party, perhaps a friend or relative, can be another potential solution, given they meet the lender’s eligibility criteria such as a good credit score and adequate insurance coverage. Please be aware that not all financial institutions will allow a loan transfer, and if they do, it’s important to ensure all necessary paperwork is completed to avoid any future liabilities.

Refinancing Your Auto Loan

If selling your car isn’t an option and you’re struggling with monthly payments, consider speaking to your lender about refinancing or modifying your loan terms. This could potentially reduce your monthly payments or interest rate, particularly if your credit score has improved since you first took out the loan.

Voluntarily Surrendering Your Car to Your Lender

Voluntary repossession should be your last resort, as it can significantly impact your credit score. If all else fails and you’re on the verge of defaulting on your loan, you could opt to voluntarily surrender your car to the lender. However, be prepared to cover any shortfall if the auction sale doesn’t cover the full loan amount.


*Toronto Car Loans is not responsible for the accuracy of this information, and this information is for educational purposes only*

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Disclaimer: The information provided in this article is for general informational purposes only. It is not intended as legal, financial, or professional advice, and should not be taken as such. Always consult with a qualified professional or specialist before making any decisions based on the information provided. While every effort has been made to ensure the accuracy and completeness of this information, no guarantee is given nor responsibility taken for errors, omissions, or updates.

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