Selling a Car When the Loan is Bad

Most people are underwater on a car loan for at least the first couple of years, mainly because the second you drive off of the lot, your car can lose up to 30% of its value. The sales staff at car dealerships can make a bad deal in practice look very good on paper, causing you to regret making the purchase pretty quickly. One of the main reasons people want to sell a car they bought recently is because the loan has a terrible interest rate, but doing so can be fairly tricky.

Refinance or Sell/Trade the Car?

Refinancing an auto loan generally doesn’t cost a lot of money but is usually only an option for those who currently have good credit. If you are paying any more than around 8% on a car loan, taking a look at your refinancing options is usually a pretty good idea. Under an 8% rate, especially if you are more than halfway through the term of your loan, isn’t worth it in most cases.

For those unable to refinance their car due to income or credit limitations, selling the car or trading it in may be a possibility. Dealerships are usually happy to take a look at what they can do for you, but even then their options might be limited. If your loan’s principal is more than what your vehicle is worth, you and the buyer will need to talk with your lender in order to sell it. More than likely, the buyer will pay the agreed upon price to the bank while you will have to come up with the difference between the amount left on the loan and the price of the car.

What are the Consequences?

Refinancing usually does not have much in the way of consequences on your credit report. If you change lenders, your old auto loan account will show as closed while a new one is opened. This shouldn’t affect your score much positively or negatively.

If the situation is bad enough to warrant a repossession, either voluntarily or involuntarily, your credit score is going to fall substantially. This is typically only done if you cannot find a buyer, or come up with the difference to satisfy the total loan amount when selling to a third party.

Avoiding the Problem Next Time

Keeping your car payment to 10% or less of your monthly income is a good way to avoid having to sell in a tough spot in the future. If the only loans you can get approved for have interest rates well into the double digits, you may want to think about buying a cheaper car with cash, or find a dealership that finances their vehicles in-house.


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