How Do I Get Out of My Car Loan?

Photo: My personal car, which is owned free and clear.  We paid it off using strategy 1 below.


Americans have grown accustomed to car loans. It just seems normal to buy cars that are brand new and finance them for $300, $400, or even $500 a month. This is a culture with a mindset that so much a month is fine. Paying a car payment every month is just insanity. I admit. I once was insane. I had a dreaded car payment. I paid $220 a month for my 2005 Pontiac Grand Prix. I purchased it in July of 2009 and paid it off in July of 2013. I paid it off one year earlier than was laid out in the original loan agreement. Why did I do this? Because I didn’t want to pay any more interest!!! I wanted to free up $220 a month. I started taking that $220 a month and started building my wealth by paying off another debt. 

My wife and I got married in June of 2013. We went on a honeymoon to Jamaica (we paid cash for the honeymoon). Right after we got back from the honeymoon, we wrote a check and paid off my car. I had $3,703 left on my car loan when we wrote a check and paid it off. We then worked and worked to pay off my wife’s car. When my wife got her first job, she went out and bought a brand new 2011 Toyota Venza. When we got married, the Venza loan balance was $18,169. I remember the date when we paid off my wife’s car. It was January 31, 2014. We had been married seven months and we took our savings and paid it off in one lump sum. Seven months after we got married, we had freed up all of our income for saving and investing. It was a wonderful feeling to get rid of that much debt. 

Today, we both still own our debt free cars. My car is now ten years old, and I recently calculated my monthly repair expenses for my car in 2014. I spent on average $99 a month on my car (this figure does not include gas expenses). My car required new tires, oil changes and a $600 repair. The $99 a month is much cheaper than paying a monthly loan payment to a bank. I would much rather pay for repairs on my car than pay a bank monthly for the right to drive their car. I own my car! When you have a loan, you don’t own the car. That’s why the bank keeps the title. My wife’s car is 4 years old. I recently calculated the monthly expenses for her car in 2014. We spent on average $13 a month on auto maintenance. Since my wife’s car is newer, these expenses are only oil changes. Prior to paying off my wife’s car, our monthly car payment was $515. Her loan was supposed to last until July of 2016. Since we paid it off early, we saved $502 a month on my wife’s car just by owning the car. 

Why do I tell you this story? It’s not to brag. It’s to show that it is possible to live without a car payment. Not only is it possible, it is absolutely necessary. Cars go down in value so fast, that it is not worth purchasing a brand new car. From a 2010 article on Edmunds.com, they stated that the car value of a car depreciates 61% in 5 years. They also stated that your car loses 15%-25% of its value every year, during the first five years. As a person who is trying to build wealth or someone who is trying to get out of debt, you can’t afford the loss in value that a new car takes. It’s financial suicide to buy a brand new car. This is why my wife and I will no longer buy new cars. 

Now, that I have gone on my car loan and new car rant, it is time to talk about the title of this article. How can I get out of my car loan? 

Strategy 1: 

Keep the cars and pay the loans off as fast as possible. As I mentioned in a previous article, debt is a huge burden and must be dealt with immediately. You can pay off your car loan as fast as possible. My wife and I paid off both of our car loans in seven months after we got married. It can be done. You need to take all extra money and throw it at the cars. Soon one car will be paid off and then you can take that payment and use that payment to pay extra on the other car. This is serious and must be dealt with immediately.

Strategy 2: 

This option has you selling the cars to get rid of the debt. The big problem with this option is that a lot of people are upside down in their cars. Upside down means that the loan balance is higher than the value of the car. This can happen because new cars lose their value rapidly as stated earlier in this article. Since most people in a car loans are upside down, I will explain how you can get out of a loan like this. 

First, you must figure out how much the car is worth and compare the value to the amount left on the loan. You would then go to a bank or credit union and ask for a personal loan in the amount of the difference plus a little bit for a cheap car. Look at the chart below to better explain the process of this strategy. 

The three examples above allow me to show some slight variations to the general rule. The person, in example 1, is $3,500 in the hole on the car. Therefore, I suggest that they request for a $5,500 personal loan. They will be able to use the $3,500 to pay off the rest of the car and use the other $2,000 to buy an older car. The car just needs to get you from point a to point b, until you can afford a nicer car with cash. 

The car owner in example 2 is $5,000 upside down. On a positive note, this car owner has $3,000 in savings. I would suggest using $2,000 of the savings to pay for the difference and then I would leave the other $1,000 in the bank. I would keep the $1,000 in the bank for any emergencies that may arise. It is nice having a cushion to fall back on. I would then ask for a $5,000 personal loan, which $3,000 will pay off the rest of the balance and then use the other $2,000 to buy an older car. 

The final example is not very common, but is possible. I would suggest just paying this debt down as fast as possible, but if you are set on selling the car, then you are in a good position. The car is worth more than the loan. I would use the $2,000 from the sale of the car to buy an older car and you no longer have a car debt. These examples give you an idea of how to get out of a large car debt and lower your overall debt. 

Now that I am done with car loans, how do I pay cash for a car? 

I can elaborate on this question in a later post, but not everyone is going to be happy driving around a $2,000 car. I am currently happy driving around in a car valued at $3,300, but that is because I don’t want to spend money on the purchase of a newer car. To buy a nicer car, I would basically start paying myself a car payment monthly. This money would go into a savings account, and you can use this money to buy a nicer car for cash. The idea is that one must plan ahead for big purchases. For example, let’s use $200 a month as a savings rate for a new car. In 12 months, I would have $2,400 in the bank. You could sell the $2,000 car and now buy a $4,400 car (cars don’t lose much value once they hit $2,000). You could then save $200 a month for another twelve months. This would give you another $2,400 and then you could put that with $4,000 and buy a $6,000 car. This strategy can continue until you have finally purchased a $10,000 car with cash. I anticipate my next car purchase to be about $10,000 and I will pay cash for that car.  One of the smartest financial decisions anyone can make it to purchase cars with cash.  Paying cash is the only way to be able to afford vehicles that go down in value.


I strongly suggest looking at the car depreciation chart from edmonds.com.

If you are interested in reading more articles about getting out of debt on this site, follow the links for Step 1, and Step 2