by Aidan Kang, CFA
Senior Writer
UPDATED: October 26, 2022

So, you have a new car. After a few days since bringing it home, you realize that you’ve entered into a bad car loan deal. Or you no longer think the car fits your needs or you suddenly experience financial difficulties. For some reason, you feel like you want to back out. “How do I get out of a car loan?” you wonder. Can you even do that?

Let us consider a few scenarios on the possible questions you have when you want to cancel your car loan agreement.

Can You Cancel a Car Loan When You Change Your Mind?

The short answer is no. There’s normally no buyer’s remorse in the car loan contract nor a cancellation clause. The federal “cooling off” rule, which gives you three days to cancel a high-pressure purchase, doesn’t apply to car sales. So, it’s better to do proper research and consider all options before entering into a loan agreement. Once you signed the deal, the car is yours. But it’s not entirely impossible to back out, and you have options.

You may not entirely cancel the car loan contract, but you can do a few other things that may help your financial situation. However, they have consequences.

How Do I Get Out of a Bad Car Loan?

Being stuck with a bad car loan or experiencing sudden financial difficulty that limits your ability to repay that loan is not a good thing to go through. Here are some options you can turn to when worse comes to worst.

1. Refinance Your Car Loan

When you know that your current car loan is not the best for you, one solution you can take is to refinance it. Refinancing means applying for a new loan to replace the current one, usually with lower monthly amortization and interest rate.

The downside, however, is that you have to stick with your current loan for at least one year before you can refinance it. You also need a good credit score to qualify. More often than not, it’s best to refinance with a new lender, although it’s not impossible to refinance with your current one.

In addition to good credit, other requirements you must meet include your vehicle’s equity, age, and mileage.

2. Cancel After-sales Coverages

While you can’t refinance your car loan immediately, you can cancel add-ons that you bought upon signing the deal. These include an extended warranty, gap insurance, tire and wheel protection, and prepaid maintenance plan. You may not recover the full price you paid, but you can get a refund on a portion of it and cancel the coverage.

Meanwhile, if you purchased other products that were installed in your car, such as a theft alarm system, paint sealant, or window tints, you will not be able to cancel them and get a refund.

3. Choose a Voluntary Repossession

If you prefer to break your contract, you can opt for a voluntary repossession. It means that you’ll return the car to the dealership rather than wait for them to begin the repossession process when you don’t settle your monthly repayments. The dealer will sell the car, but you’ll have to pay any remaining amount from the original loan you signed.

NOTE: You need to be very careful with this option, however, because it’s still a repossession. It will reflect on your credit report and hurt your credit score.

4. Sell the Car

It’s your car already, so you can sell it privately if you want. You can set the price, and in some instances, you can ask for more than the amount of your car loan. So, you can use the money to pay off your car loan and still have some money left.

In most cases, however, it’s difficult to ask for more than your loan amount since cars depreciate as soon as you drive them off the dealership. You’d have to check the market value of your car and consider a few factors, such as age, model, make, and condition of the car. You must also take into account unpaid interest, which means you may have to pay more than the remaining balance in your car loan. You may also have to pay early repayment penalties. You’re exempt from prepayment charges if your loan term is longer than 61 months, so you can make early payments anytime without penalties. Taking out a long-term auto loan means you’ll pay more interest and you could end up owing more than what your car is worth.

Considering all the factors, if your car’s value is less than your loan amount, it’s not ideal to go with this option. You should seek the help of a professional appraiser before you put your car on sale.

5. Downgrade to a Less Expensive Vehicle

When you can’t refinance your car, trading it in for a less expensive one can work for you. Bring your car to your dealer and ask for a downgrade to a less expensive and used car. Doing so will reduce your loan balance. If you have excess equity in your car, you can use the money to pay your loan.

6. Transfer the Excess Balance to Your Credit Card

If paying the monthly car repayment amount is your problem, moving the excess balance to your credit card can make the payments more manageable. This works if you have a huge credit line and you can take advantage of a 0% introductory annual percentage rate (APR).

However, you need to be disciplined about paying your credit card so that you will not create more financial trouble for yourself. Getting into credit card debts will hurt your credit standing. So, make sure you can commit to paying regularly and timely to avoid incurring additional interests and penalties.

How to Avoid Bad Car Loans?

To avoid a terrible experience of getting into bad car loans, you need to make sure you’re taking the right steps from the outset. You need to do your research and deal-making well. Here’s your checklist for car loans:

Shop around and compare offers. Don’t stick to the first lender and dealership you found online or in your area. Make sure that you check different offers and compare their rates so that you’ll end up with the best deal for you. Check online reviews from previous customers to gauge the quality of their services and find the best car loan.

Secure a pre-approved car loan. Before you go to a car dealer, it’s best to get a preapproved loan. It will allow you to know your interest rate and streamline your options for car models.

Check the car’s real market value. A dealer may oversell a car, so it pays to be knowledgeable about the true pricing of the car you want. You can check car websites, like Edmunds or TrueCar, for the car’s current pricing.

Estimate the car payment. With the help of an auto loan calculator, you can have an idea of how much you’ll have to pay for the car every month. Make sure that it fits your budget.

Test drive the car. Visit the dealer and test drive the car that you want. It will help you get the feel of owning it and if it fits your needs. Inspect the vehicle carefully before you sign any deal.

Negotiate with the dealer. Let the sales manager know that you’ve been shopping around and comparing prices for the car model that you want. Then, ask for the dealer’s best offer. Because you know the true market value, you’ll know if you’re getting a better deal or not. Try to negotiate an offer lower than the market value.

Say no to add-ons. Expect the sales manager to pull an upsell strategy once you’ve agreed on an offer. You will likely receive an offer to purchase extended warranties or install car technology and accessories. Prepare yourself to say no to such offers.

Study the loan terms carefully. Before you sign anything, make sure that you read the contract carefully and study the loan terms. Check the numbers to ensure that they are correct and reflect on what you’ve agreed on.

Pay at least a 20% down payment. The bigger your down payment, the lower your monthly repayment. It will also help you stay in positive equity and avoid getting into an upside-down car loan. It means that the amount you owe is more than the value of your car.

Know Your Rights

Aside from doing your research and deal-making well, it’s also important that you know your rights. There are a few laws that can help you avoid getting into undesirable car loan situations:

1. The Truth in Lending Act

Your lender must provide you with a detailed written disclosure of important loan terms, including the amount financed, APR, finance charges, payment due dates, monthly repayment amount, length of the loan, and late payment penalties. It’s called “Truth in Lending Disclosure Statement,” which you should receive before signing any document. If you agreed on anything during verbal negotiations, they should be put in writing, as no verbal agreement will be valid in case you run into trouble.

2. The Risk-Based Pricing Rule

If you’ve been offered less desirable loan terms than others due to low credit scores, your lender should provide you with a “Credit Score Disclosure Notice.” This document lets you know the factors that affected your credit rating, which is why the lender considers you a higher risk.

3. The Equal Credit Opportunity Act

This law protects you from credit discrimination. It means that lenders should not deny your application or charge you with higher interest rates based on your race, age, gender, sex, marital status, national origin, and color.

4. The Fair Credit Reporting Act

If your lender gave you higher interest rates than others or denied your application on the basis of your credit score, you have the right to a complimentary copy of your credit report from the national credit bureaus, Equifax, Experian, and TransUnion. You must check your credit history and validate its accuracies.


Realizing that you’ve entered into a bad car loan deal or getting into financial troubles soon after you got your car is a terrible experience. Don’t despair though because you have options. Keep in mind our tips above, assess your situation carefully, and find which solution best suits your situation. Consult experts for more guidance.

Are you thinking of a way out of your current car loan? Share with us your experience in the comments below!