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How to Get Out From Under a Bad Car Loan

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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We all make mistakes. Maybe you’re struggling to pay your bills, especially your car loan, and are looking for a way to get out from under that burden. Or perhaps you’re doing better financially than when you purchased your car and it’s time to refinance into a better loan. No matter how you got into a bad car loan or why you want out of it, you always have options.Understanding those options is the first step to improving your financial situation. Here’s what you should know:

How do I know if I have a bad car loan?

If you have a bad car loan, you probably know it. A bad car loan is one that you can’t afford, or that costs you too much money in interest expense every month. If you are struggling to make car payments or are falling behind on your loan, you’re likely in a bad car loan.

What’s important to realize is that circumstances change. You could have taken out a loan on a new pickup truck while you had a good job and could easily make the payments. When you’re unemployed, however, the truck payments become a huge burden. You may even fall behind.

Another possibility is that you could buy a car when you have a thin or damaged credit history, at a high interest rate. A year or two later, when you have a decent credit score, you could do a lot better. A good car loan when you bought the car is a bad car loan now.

If you think you’re in a bad car loan or one that no longer fits your needs, it’s time to start finding ways out of that loan.

What’s a good interest rate for a car loan?

The interest rate level you should consider to be “bad” depends on your situation, primarily your credit score. “The interest rate you pay should not be higher than what you would pay on a credit card,” said Bruce McClary, vice president of public relations and communications at the National Foundation for Credit Counseling (NFCC) in Washington, DC. “Check your credit score and see where you are. Could you qualify for a lower interest rate loan? If you have a credit score in the 700s or 800s, you’ll get a good loan. If it’s in the 500s or 600s, you’ll probably still have to pay a higher interest rate.”

Generally speaking, the higher the interest rate, the more important it is to try to find another solution. “I would say any auto loan that carries an interest rate in the 20% range is something you would want to get out of quickly,” said McClary. “In the teens, in the high end, you should consider refinancing.”

6 ways to get out of a bad car loan

Before you decide how you should get out of a bad car loan, you should decide exactly what you hope to accomplish by doing so. Are you trying to get a lower interest rate, keep your car or not have car payments at all? If you don’t set clear goals, you could get out of one bad loan only to make your financial situation worse.

Once you know what you want to achieve, you can decide which of these options is best for you:

1. Refinance a car loan

If your only car problem is that you took out a loan with a too-high interest rate, either because your credit score was lower or because you didn’t shop around as well as you could have, you should probably refinance your car. In fact, if you have a car loan, it pays to occasionally check that you are still getting the best deal possible on your car loan.

Refinancing with a new lender can help your credit history if you have missed payments on your car loan. “You can get creative, refinancing the amount you owe and flipping it into a new loan,” said McClary. “Then, you’re starting with an account that is healthy.” Bear in mind that if you have missed payments, your current lender has probably already reported negative information to the credit bureaus. That information will stay on your credit history for up to seven years, even after you close the account.

You could also refinance your car loan if you want to change the length of the loan. For example, say you originally took out a 3-year loan, but the payments are too high. You might refinance with a 4- or 5-year loan, instead.

Refinancing a car is almost always a better financial decision than getting a new car to get out of a loan. You generally pay a few fees to refinance, but you avoid paying sales tax on a new car, and you avoid the temptation to buy a more expensive car, just to get out of a bad loan.

Be sure to shop around for a car loan refinance. You can start your search at your local bank or credit union, or online at MagnifyMoney. Fill out an online form, and receive potential refinance auto loan offers from lenders at once, depending on your creditworthiness. Use the auto loan calculator to see how much a car loan should cost, and how much you can afford.

2. Renegotiate a car loan

If you just need help getting back on track, or need to make your payments more affordable, you can talk to your current lender. They may offer temporary hardship forbearance in certain circumstances, which means they can allow you a little more time to catch up.

Another way they may help is by extending the terms of your loan so your payments are lower. Be aware that the longer the term, the more total interest you will pay before your loan is paid off.

3. Pay off a car loan

If you want to keep your car, look for a way to pay off or pay down your car loan. You may have savings you could use, if you can do so without jeopardizing your emergency fund and other goals.

Avoid taking money out of your retirement account. For one thing, you could owe a hefty penalty and taxes to the Internal Revenue Service. For another, retirement funds are for retirement.

You could also sell investments or other vehicles to pay off your loan, or work extra hours. Even if all you can do is make extra payments on your principal every month, you will pay off your car loan more quickly, and save a significant amount of interest expense.

If you don’t want to keep your car; for example, if your household has two cars and can get along with one, you can sell your car to pay off the loan. You’ll get the best price if you sell your car yourself. Be aware that you need to gain enough from the sale to pay off the loan, or come up with the difference yourself.

4. Trade in a car to get rid of a bad loan

If you need a new car anyway, you could trade in your old car as a down payment on a new one. The advantage of getting out of your car loan and car ownership, this way is that it’s easy. The dealership is motivated to sell you another car, so they’re almost certain to take your old car. They may even take it if you’re underwater on your current loan — if you owe more than it’s worth — and roll the excess amount you owe into your new loan.

Trading in your car can be a good idea if you are hesitant to try and sell your car yourself, and you need a more reliable or different car.

It is not a good idea for people who might use a bad car loan as an excuse to trade up to a more expensive car that strains their budget and prevents them from ever paying off a car or reaching other financial goals.

If you trade in your car, make sure you get the best loan you can get. Check your credit score before you go car shopping, and make any improvements to your score before you shop for a loan. Don’t just take financing at the dealership without comparison shopping the loans first.

5. Surrender the car to the lender

If you’re in financial trouble and you can’t keep up your car payments, one option is to give up your car. You can drive your car to the lender, or wait for them to come and get it.

Either of these options should only be a last resort. “You can turn in the car,” said McClary. “They’re holding it as collateral. You can give them the keys and say, ‘Here. I can no longer afford it.’”

The problem with turning in your car is that it is a “voluntary repossession.” If you owe more on the car than the car is worth and you can’t pay the excess amount (which is likely if you can’t afford your payments), it may harm your credit history and score. You should also be prepared to keep making your car payments until they sell the car, if possible. “You need to talk to someone immediately about clearing it,” said McClary. “Your credit won’t get any better unless you continue to make payments until they sell the car.”

Whether you turn in your car voluntarily, or you miss payments and they tow it out of your driveway, the repossession will be reported on your credit report.

The lender can sue you for the deficiency, or the difference between the amount you owe and the amount the car is worth, less the expenses of selling the car. So it’s possible you can lose or turn in your car, and still have car payments. And now your credit report is damaged, so any car loan you get will likely carry a high interest rate.

6. File for bankruptcy

If your finances have reached a point where you cannot pay your bills and you don’t see any other way out of debt, you may need to consider bankruptcy.Chapter 7 or Chapter 13 bankruptcy can actually help you keep your car, which can be important if you need it to get to work and earn a living.

Filing for bankruptcy doesn’t get you out of a car loan, however. You must continue payments on your car loan to keep your car in bankruptcy. However, filing for bankruptcy can give you relief from collection efforts by other creditors, making it easier for you to keep up with your car payments.

If you are considering bankruptcy and you want to keep your car and car loan, you must indicate to the court that you want to “reaffirm” the debt. By reaffirming, you promise to pay your car loan as if you had not filed for bankruptcy, in exchange for keeping the car. You must show that you can afford to make the payments and that the vehicle is necessary. Your ability to keep your car may depend on your equity in it, and your state law. If you reaffirm the debt, but fail to make the payments, you can still lose the car.

Alternatively, you can surrender your car in bankruptcy. In a Chapter 7 bankruptcy, this wipes out your debt. You may be able to keep your car until the bankruptcy is finalized.

Remember your long-term goals when getting out from under a bad car loan

It’s easy to think about short-term fixes to financial problems. And getting through this month and the next is important. Try to choose a path that lowers your interest expense and total debt, if possible. Avoid decisions that can harm your credit history. Your long-term financial health depends on taking a longer-term view as you decide on the best way to get out of your bad car loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sally Herigstad
Sally Herigstad |

Sally Herigstad is a writer at MagnifyMoney. You can email Sally here

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Navy Federal Credit Union Auto Loan Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you are shopping for an auto loan, it’s helpful to get quotes from multiple lenders to ensure you receive the lowest possible interest rate and most favorable terms. For members of the military and their families, Navy Federal Credit Union could be an option.

Here’s what we found out about Navy Federal Credit Union and its auto loans.

About Navy Federal Credit Union

Navy Federal Credit Union, which was founded in 1933 and is headquartered in Vienna, Va., serves the military community. Its “once a member, always a member” policy means that you can continue to use the credit union if you or your family member leaves the military.

The following groups are eligible for membership:

  • Active-duty members of the Air Force, Air National Guard, Army, Coast Guard, Marine Corps and Navy
  • Delayed Entry Program (DEP) enlistees
  • Department of Defense officer candidates/ROTC participants
  • Department of Defense reservists
  • Veterans, retirees and annuitants

Parents, grandparents, spouses, siblings, children and grandchildren in a military family are also eligible, as are household members. Department of Defense civilian employees can become members, too.

Consumer Financial Protection Bureau action against credit union

It’s important to note that in 2016 the credit union was ordered by the Consumer Financial Protection Bureau, or CFPB, to pay $28.5 million after an investigation found that, among other things, it was improperly restricting account access for members with delinquent loans. The CFPB accused the credit union of making false threats of legal action and wage garnishment, threatening to contact delinquent members’ commanding officers and lying about the consequences of falling behind on loan payments. Of that total, $23 million would go to victims who received threatening letters. The credit union was required to correct its debt collection practices.

Navy Federal Credit Union: At a glance

When shopping for an auto loan, it’s crucial to get several quotes, no matter your credit score. If you have an array of loan options, you’ll have more negotiating power with a dealership.

APRs

APRs for Navy Federal Credit Union auto loans, which are based on creditworthiness, currently start at 2.99%.

Here’s a breakdown of APRs based on the type of vehicle:

  • New vehicles: 2.99% to 6.29% for loan terms between up to 36 months and 96 months
  • Late-model used vehicles: 3.29%* to 4.79%* for loan terms between up to 36 months and 72 months
  • Used vehicles: 4.99% to 6.29% for loan terms between up to 36 months and 72 months

Used vehicles older than 20 years are paid back at a collateral loan APR, which can be between 8.09%* and 8.9%* for loan terms between up to 60 months and 180 months. Preapproval isn’t available for this type of loan.

Your rate could be higher, depending on your credit profile and the value of the vehicle.

Active-duty and retired military members may be eligible for an additional discount with direct deposit to a Navy Federal Credit Union account. To get the discount, call or visit the credit union.

Vehicle requirements

Navy Federal Credit Union has specific vehicle requirements for its auto loans. For new vehicles, the minimum loan amount is $30,000 if seeking a term of 85 to 96 months. Used vehicles are 2017 models or older, or any model year with more than 30,000 miles. Late-model used vehicles can be model years 2018 to 2020 with 7,500 to 30,000 miles.

Boat, motorcycle and RV loans

The credit union also offers new and used boat, motorcycle and recreational vehicle (RV) loans. These loans only apply to recreational vehicles, so full-time RVs aren’t eligible. Here’s a breakdown of APRs based on the type of vehicle:

  • New boats: 6.05%* to 8.75%* for loan terms between up to 36 months and 180 months
  • Used boats: 8.05%* to 9.2%* for loan terms between up to 36 months and 180 months
  • New motorcycles: 7.25%* to 8.6%* for loan terms between up to 36 months and 84 months
  • Used motorcycles: 8.09%* to 9.35%* for loan terms between up to 36 months and 72 months
  • RVs (collateral loans): 8.09%* to 8.9%* for loan terms between up to 60 months and 180 months

These rates are based on creditworthiness, so your rate may be higher.

As with auto loans, there are specific requirements when it comes to boats, motorcycles and RVs. Check with the credit union for details.

Refinancing

Navy Federal Credit Union also offers auto loan refinancing.

Here’s a breakdown of APRs based on the type of vehicle:

  • New vehicles: 2.99% to 6.29% for loan terms between up to 36 months and 96 months
  • Late-model used vehicles: 3.29%* to 4.79%* for loan terms between up to 36 months and 72 months
  • Used vehicles: 4.99% to 6.29% for loan terms between up to 36 months and 12 months

Members may be eligible for $200 cash back 61 to 65 days after completing their first scheduled payment when refinancing from another lender.

A closer look at Navy Federal Credit Union auto loans

Highlights of Navy Federal Credit Union auto loans

A down payment isn’t required to get a Navy Federal Credit Union auto loan, but making one could improve your loan-to-value ratio, which could boost your chances of getting approved.

If you have a limited credit history, you may still get approved with a co-applicant.

You could get a decision about your application in just a few minutes. The credit union offers preapprovals, so you know how much money you can spend on your vehicle before you start shopping. If you get preapproved, your rate will be locked for 60 days.

The credit union offers an auto buying program, through a nationwide network of dealers, as a straightforward way to buy a new or used car. You can even get special military prices if members need to buy a new car while overseas.

You can get optional guaranteed asset protection (GAP) insurance for existing or new auto loans through the credit union. It also offers some discounts on GEICO auto insurance, depending on your state of residence.

Lowlights of Navy Federal Credit Union auto loan

If you don’t have ties to the military, you won’t be able to access Navy Federal Credit Union’s services, including its auto loans.

If you are approved for an auto loan, you must either pick up your check in person at a branch or receive it via mail. There may be a fee associated with mailed loan checks. If you had a co-applicant with a different mailing address, the check and promissory note will be sent to them. Some applicants may find this inconvenient, especially if their co-applicant lives far away.

On the credit union’s website, minimum interest rates are noted in detail for used vehicles, new vehicles, boats, RVs and motorcycles. The website, however, doesn’t note its maximum interest rates or discuss specific credit requirements for auto loan approval. The credit union did not respond to emails requesting this information.

How to apply for a Navy Federal Credit Union auto loan

To apply for an auto loan from Navy Federal Credit Union, you’ll first need to become a member. You can apply at a branch or online, and you won’t be charged an application fee.

Make sure to gather contact information for both you and your co-applicant, if you have one. If you’ve picked out the vehicle you want, you’ll need its 17-character vehicle identification number (VIN), the state where it will be registered, the dealer or seller’s name and the mileage reading on the odometer.

If you don’t have a specific vehicle in mind, you’ll need an estimate of the type, age and price of the vehicle you want to buy, including the warranty, title, tax and license fees minus the down payment. You’ll also need to know about how long of a loan term you’d prefer.

The credit union requires personal information, including employment and income details for both you and your potential co-applicant. It’ll ask for your current housing information, too. The credit union already has identity information about its members, and it’ll base its decision on your credit history, the amount of money you want to borrow and the value of your collateral.

You’ll receive a text or email from the credit union to let you know whether it approved your application. Most applicants get a decision in about five minutes.

The fine print

Navy Federal Credit Union’s website doesn’t indicate whether it charges any additional fees for auto loan borrowers. The only fee mentioned is the one that the credit union may charge to mail a physical check to an applicant or co-applicant, as mentioned above.

Who is a Navy Federal Credit Union auto loan best for?

The credit union is a great option for people with ties to the military who want to work with a credit union that has friendly policies and decent interest rates.

Like many credit unions, this one offers competitive interest rates for those with good credit. Even if you are already a member and know you’ll apply for an auto loan with this lender, it’s still important to shop around for the best rates so you can be sure you are paying the lowest possible amount for access to the money you need to buy a car.

*Rate accurate as of August 22, 2019

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Rachel Morey
Rachel Morey |

Rachel Morey is a writer at MagnifyMoney. You can email Rachel here

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Buying a Car: When to Walk Away

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Walk away from car deal
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Buying a car can be a stressful experience for anyone. For some of us, the anxiety begins before we start negotiating financing or even step foot onto a car lot. But no matter how eager you are to get the experience over with, or how persistent a salesperson is, you should never buy a car without being certain it’s right for you.Ron Montoya, consumer advice editor for Edmunds, says that dealerships are good at applying pressure. “There’s always a sense of urgency that ‘today is the best day to buy the car,’” he says. “While that may be true for the seller, it’s not always the case for the buyer.”

According to a 2018 Cox Automotive study, you may be tempted to give in to the pressure after spending a whopping three hours at a lot, which is the average amount of time buyers spend. But no matter the circumstance, you should always be prepared to walk away in the presence of red flags.

How do you negotiate in “good faith?”

Like most things in life, a bit of preparation can go a long way. Here are some of the ways you can reduce your risk before approaching a dealership or private seller when buying a car:

Review your budget and credit

Doing your financial homework can help you determine what price range is truly affordable for you, instead of letting a salesperson decide. Loan payment calculators can also help you get a realistic view of affordability by taking interest rates and fees into account.

Get loan preapproval

Another factor in determining affordability is the amount of financing you get approved for. Having a loan preapproval from your bank or credit union, before visiting a dealer, has several benefits: it sets realistic expectations about the maximum sales price you can shop for and helps you avoid more expensive or even potentially predatory dealer financing. If the dealer can beat your preappoved loan offer either through one of its lender partners or through the manufacturer, you’ll know you’re getting the best deal possible.

Research market prices

Montoya, who purchases fleet vehicles for Edmunds, an auto industry research firm which tests cars, says the best way to prepare for a purchase is to understand the market price of the car you want. You can do this by looking up values through sites like Kelley Blue Book or Edmunds, checking out a variety of ads and car-buying websites, and even by getting a few price quotes, so you can compare them to the offers you get from a dealership.

Research promotions

Having a sense of manufacturer and dealer promotions can not only help you narrow down which models to buy and which lots to visit in your area, but it can also help you understand if the dealer is truly offering a “one day only” sale, or if it’s just a tactic to pressure you into buying.

What are the warning signs that you should walk away from a car deal?

Interacting with a salesperson who’s been trained to haggle and close the deal might leave you feeling outwitted. Some level of stress is normal, but these are the real red flags to look out for:

Prices change after your initial negotiations.

For example, your trade-in value is lower than what you discussed or your monthly payments are higher. You should also look out for add-ons you didn’t agree to, like an extended warranty or a “service contract” that increases the overall price tag. Montoya says it should be a deal-breaker when written terms don’t match what you discussed.

The contract isn’t final.

It’s easy to assume that signing a contract means your deal is final, but some dealers include contingencies, including “spot deliveries” that might be “yo-yo transactions” meant to intentionally deceive buyers.

If your contract states, for example, that your financing isn’t final, you may be asked to come back later and get a different loan with worse terms, for the car you’ve already taken home. If the dealer won’t state in writing that your financing is final, they may be breaking the law. This is a definite sign that you should walk away.

You’re being pressured.

Brent Miller, executive director of a community center where musicians work, practice and perform in San Francisco, recently shopped for a new car. Miller says despite visiting a reputable dealership for his purchase, the salesperson repeatedly pushed him to make unwanted decisions. “It was amazing how much pressure there was to sign the contract without reading everything, even before I had a loan offer,” Miller says.

If you’re encouraged to buy a different car than the one you’re shopping for, or to close the deal without looking over the numbers, Montoya says you should walk away.

The seller is withholding information.

It’s a red flag if your salesperson gives unclear information about pricing and loan terms. If you can’t get a straight answer on what your monthly payment will be, the length of your repayment term or your interest rate, you shouldn’t sign a contract. A good tip is to keep your focus on the out-the-door price of the car — if you get the lowest price possible, a good monthly payment should follow.

Discriminatory practices

If you feel a dealer is attempting to take advantage of you based on your citizenship status, income or other factors, you should go elsewhere. One way dealers do this is by marketing to you and conducting negotiations in your first language and then offering you a contract in a different language, with higher fees. Regardless of the circumstances, never sign a contract if you’re unsure what it says.

How to walk away from a car deal

So you’ve attempted to negotiate a deal with no luck, or you’re simply uncomfortable with the transaction. It’s completely within your rights to walk away at any point before, and in some cases even after you sign your contract.

During negotiations

At this point, walking away is as simple as putting one foot in front of the other. Montoya advises that even if the dealer already pulled your credit information, you’re still under no obligation to stay. While you may be concerned about the hit to your credit, know that making multiple auto loan applications within a short period of time will have a small impact on your scores.

If you’re having trouble ending the negotiations, Montoya suggests shutting down persistent salespeople by shifting the blame to someone else, like your spouse…even if you’re not married.

Whatever your explanation, walking away or telling the dealer you’re going to shop around is perfectly acceptable. If you really are interested in buying the car, walking away may also be a useful negotiation tactic.

Once you’ve seen the contract

Regardless of the time and effort invested by both parties, you are under no obligation to sign any contract you’ve been presented. At this point in the process you can still simply say “no” to the dealer.

After signing contract

If you sign a contract and drive away with a car, but then get called back based on a contingency, you may be able to walk away from the deal.

If you’re called back because financing fell through, you can demand to get your down payment back and unwind the entire transaction. To complete the process you’ll need to make sure that the application and contract are cancelled and that you get copies of all the documents.

If, on the other hand, you simply wish to return the car because you’ve changed your mind, your options may be limited. Some state laws may allow you to return your car if you discover it’s a lemon, but contrary to popular belief the “cooling off period” unfortunately doesn’t apply to cars.

In some circumstances you may have a special option to cancel, particularly when it comes to buying used cars. New York state law, for example, gives you a set amount of time to file paperwork and cancel your contract. Your dealer may also have a special clause that gives you time to reconsider and return your vehicle. But if neither your state nor your contract stipulates that you can cancel, your best shot is to ask the dealer to give special consideration to your case.

The bottom line

The best way to avoid a bad deal is to be your own biggest advocate. Educating yourself about market prices, understanding affordability and researching consumer protections in your state, all before you talk to a salesperson, can help you stand up to pressure and recognize red flags quickly.

Ultimately you shouldn’t be afraid to walk away, no matter how difficult the dealer makes it to leave. Both the car and the financing have to work for you. “I want people to buy a car when its right for them and do it on their own time,” says Montoya, “not a dealership’s time.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sarah Brady
Sarah Brady |

Sarah Brady is a writer at MagnifyMoney. You can email Sarah here