Can You Legally Get Out of a Bad Car Loan?

Can You Legally Get Out of a Bad Car Loan?

Carrie Pallardy
Carrie Pallardy
 | 
The COVID-19 pandemic has left people scrambling to cover their bills: monthly rent, mortgages, utilities and even groceries have become a struggle for many individuals and families. With those immediate needs as a concern, debt has had to take back seat in many cases. What happens when you cannot pay your car loan?

NBC News covered the story of Monique Williams. She lost her job due to the pandemic and struggled to pay for a car loan she took out in 2016. The lender would not offer any deferrals, despite the pandemic. Williams’s car died in 2019, and she still owes $2,000 on the loan.

What happens when you find yourself struggling with a bad car loan? The situation can seem inescapable, but there are some legal options.  

Evaluate Your Loan
First of all, it is important to determine what constitutes a bad loan. Factors like your credit score, your income and the terms of the loan will determine the interest rate on your car loan. Longer term loans, like 72- and 84-month loans, will likely carry higher interest rates.

Is your interest rate too high (higher than it should be taking into account your income and credit score)? Was the car’s selling price higher than it should have been? Is the trade-in value of the car too low? If you answer “yes” to any of these questions, you may find that you are struggling with a bad car loan. It is possible that you will find yourself “underwater,” meaning you owe more on the car than it is actually worth.

Take a look at your loan terms and determine the severity of the situation: how much you owe, your interest rate and your ability to pay.

Talk to Your Lender
If you are struggling to pay your car loan, talking to your lender is a good first step. Many lenders did offer deferrals to borrowers during the pandemic, according to the NBC News report. Your lender may be understanding and willing to renegotiate to help you with an underwater loan.

Consider Your Options
Some lenders will not be willing to help, which means you will need to consider a different option.
  • Cancel extra coverage. The car salesperson may have suggested some extra coverage that sounded great at the time, like an extended warranty. Check to see if you can cancel any extra coverage and receive some of your money back.
  •   Refinance the loan. Refinancing the loan may help you secure a more favorable interest rate, effectively lowering the amount of money you owe. You can shop your loan around to different lenders to find a better rate.
The new lender may ask you to sign a document granting them limited power of attorney during the refinancing process. This enables the new lender to transfer the title of your car.

Trade in the car.
You can look into trading in your car for something less expensive. This will not erase your debt if you are underwater. The car you are trading in will serve as a down payment on your new vehicle, and the excess amount you owe will be transferred to your new loan. When trading in for a less expensive vehicle, you may be able to at least lower your debt.
Whenever you take out a car loan, carefully consider the terms of the loan, including its length and the interest rate.  

This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
 
Carrie Pallardy

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