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If you’re having trouble paying your auto loan every month, you’re not alone. In fact, 5% of people were more than 90 days late on their car payments in the first quarter of 2025.

With an auto loan, the vehicle often serves as the collateral to secure financing from a lender. If you stop making payments, a lender may have the right to repossess and sell the vehicle to help recoup what is owed on the loan.

When you’re behind on payments, voluntary repossession could be an option to get out from under an auto loan. To help inform your decision, this guide will explain how the process works and the potential financial impacts of voluntary car repo.

What Is Voluntary Repossession?

Voluntary repossession is the act of returning your financed vehicle to the lienholder voluntarily. The lienholder is typically a finance company or lender that holds a security interest in your vehicle as a condition of approving your car loan.

You may initiate car repossession voluntarily if you’re unable to make car loan payments and want the lender to repossess and sell your vehicle. This voluntary surrender of car ownership may eliminate your car loan debt fully or partially when the lender sells the repossessed vehicle.

What Happens If You Voluntarily Repo Your Car?

Before giving up the keys, it’s important to know what happens if you voluntarily repo your car.

After the vehicle is turned over and sold, the sale amount goes toward paying down the loan. While this helps reduce the loan principal, borrowers may still owe money and now face the burden of getting by without a personal vehicle.

What’s more, lenders may tack on costs from the vehicle sale to the outstanding loan balance. Voluntary repossession will likely mean a significant hit to your credit score, too.

At the same time, voluntary repo lets the borrower have a say in when and how the car is transferred to the lender. Depending on how far behind you are, the vehicle could be repossessed at any time. Coming forward to hash out voluntary repossession with the lender could avoid a scenario where your car is repossessed unexpectedly.

How Does Voluntary Car Repossession Work?

When a borrower is in default on their auto loan, they could be at risk of repossession. This is because the loan agreement generally gives the lender a security interest in the car, meaning they can claim the vehicle without notice if a borrower is missing monthly payments or lacking insurance.

To initiate a voluntary repossession, borrowers can contact their lender to let them know they are unable to make their payments and discuss options. If voluntary car repossession is the chosen path forward, the borrower and lender work out the arrangements to exchange the vehicle.

There are different types of car loans, including unsecured auto loans in which the borrower faces no risk of repossession.

The difference between secured vs. unsecured auto loans is that the financed vehicle serves as collateral on the secured loan, whereas borrowers pledge no assets as collateral on an unsecured car loan.

Recommended: Guide to Car Loan Interest Rates

Voluntary Repo vs Involuntary Repo

Losing a vehicle is not an ideal outcome. But there are some differences when a lender takes back a vehicle by voluntary repo vs. involuntary repo.

If a borrower is unresponsive, lenders may resort to involuntary repossession. This can involve hiring a third-party repossession agent to seize the vehicle.

GPS tracking makes it possible for agents to take the vehicle from anywhere at any time, even if it’s on your property. Lenders may also have the right to use a “kill switch” to remotely deactivate a vehicle depending on the loan agreement and state laws. In either case, involuntary repossession can create a stressful and inconvenient situation.

With voluntary repossession, the lender is spared the effort and cost of acquiring the vehicle. This cooperation may help work out a deal with the lender and obtain more favorable terms when refinancing after repossession.

Pros of a Voluntary Repossession

•  Gives you some control when returning your vehicle

•  You may avoid certain costs and fees

•  Avoids involuntary repossession

Cons of a Voluntary Repossession

•  You lose your car

•  It can damage your credit score

•  You may owe deficiency costs if the car has insufficient resale value

The Cost Associated With Voluntary Repossession of a Car

Voluntary repossession of cars may help alleviate the burden of monthly payments, but there are costs to be aware of, too. Here are some ways your finances could be impacted:

Deficiencies

Once a vehicle is turned over to a lender, they can sell it to get back the remaining loan amount. Borrowers may not be off the hook yet, however, if there is a deficiency balance after the vehicle is sold. This means that the sale amount is less than what the borrower still owes on their auto loan.

With a deficiency balance, the lender has the legal right to determine payment options — whether it be a lump sum or repayment plan. Lenders may also use a collection agency or take legal action to recover what’s owed.

Having a deficiency balance isn’t uncommon with vehicle repossession. According to Edmunds, more than one in four consumers currently have negative equity in their car loans, with the average negative equity being $6,754.

Late Fees

When you fall behind on car loan payments, you run the risk of accumulating late fees. Often, lenders provide a car payment grace period — typically in the 10-15 day range — to make a monthly payment before it’s considered late. But if you’ve passed that mark, you may have fees start to pile up.

Voluntary repossession may also trigger additional fees related to early termination of a lease, towing the vehicle, and storing it before auction.

Bankruptcy

If you’re struggling with debt beyond an auto loan, filing for bankruptcy may be the best option. Keep in mind that doing so could have long-term financial consequences, such as challenges with getting a future car loan.

How vehicle repossession fits in will vary based on the type of bankruptcy. With Chapter 7 bankruptcy, non-exempt assets, including vehicles, are liquidated to pay debts to creditors. Note that you must meet income requirements to qualify.

Although declaring Chapter 7 bankruptcy can get you out of paying any remaining balance after the vehicle sale, any cosigner on the loan is still liable for the deficiency.

Recommended: How to Get Out of Your Car Loan

Does Voluntary Repo Affect Your Credit?

Any failure to pay a lender according to the terms of a loan agreement can hurt your credit score. Typically, lenders report auto loan default to the major credit bureaus when it is more than 30 days late.

How much does a voluntary repossession affect your credit? Voluntary repo may cause your credit score to drop dozens of points if the lender reports your car loan account and delinquency history to the nationwide credit bureaus. Some consumers may see their credit scores plunge at least 100 points.

Voluntary car repossession may be recorded as a voluntary surrender on your credit report, whereas involuntary seizure of the vehicle may appear as repossession. In either scenario, this will remain on your credit report for seven years, though its impact will wane after a few years if you stay on top of your debt.

While there isn’t a set credit score needed to refinance auto loans, dipping below 660 will make it harder to qualify for prime loan terms.

Still, borrowers with less than ideal credit can explore guaranteed auto financing.

Impact of Late Payments

Falling behind on your car loan can damage your credit score, especially if you’ve fallen into serious delinquency. As mentioned above, lenders may report missed payments to the credit bureaus if you’ve fallen 30 days past due. The impact may become more severe if you fall more than 90 days past due on your loan repayment obligations.

Impact of Collections

Falling into serious delinquency on a car loan can result in your account being placed into collections. The lender or a third-party company may attempt to collect the unpaid debt from you. Having a car loan account in collections can appear on your credit report for seven years.

Stays on Your Credit Report

As mentioned earlier, lenders may report voluntary repossessions to credit bureaus. This derogatory mark may remain on your credit report for seven years.

4 Ways to Avoid Voluntary Repossession

Voluntary repossession may not be the best choice for your finances or personal life. These alternative approaches could help avoid turning over your vehicle to creditors:

1. Refinance Your Loan

Instead of parting with your vehicle, you can try working with your lender to refinance your auto loan despite bad credit. If you’re having trouble with payments, securing a lower interest rate and extending the loan term may allow for more affordable monthly payments.

This means you’ll likely end up paying more interest over the life of the loan, which is why lenders may be agreeable to refinancing before repossession.

2. Sell the Car

Lenders can sell the car at a public auction or privately depending on state laws. This is unlikely to fetch the best price, so selling the car yourself may be worth looking into.

Being able to sell your car is complicated by the fact that the lender has a lien on the vehicle since it’s collateral for the loan. You may need to pay off the loan first to get the lien cleared, which is usually challenging if you’re already behind on payments.

3. Communicate With Your Lender

Reaching out to your lender early on when you’re having difficulties with payments could make the difference in keeping your vehicle. Lenders could be willing to renegotiate your auto loan terms, especially if you let them know early on before late fees start to accumulate.

4. Reinstate the Loan

Reinstating a car loan after repossession may be an option in certain states. If your state and contract allow, you’ll need to request a reinstatement quote from the lender that outlines your right to reinstate.

This written notice should also state the amount needed to become current on the loan and the deadline for reinstatement — usually 15 days. Unless you can pay this in time, the lender can choose to move forward with selling the vehicle.

Recommended: No Income Verification Car Loans

How Hard Is It to Get Another Vehicle After Voluntary Repossession?

For some borrowers, it might be difficult to get another vehicle after initiating a voluntary surrender of car ownership. As mentioned earlier, a voluntary surrender of car ownership may cause your credit score to plunge. How much does a voluntary repossession affect your credit? It could damage your creditworthiness and make it harder for you to qualify for auto loan financing.

Getting another vehicle after voluntary repossession may not be feasible for consumers experiencing financial hardship. You may need all cash to buy another vehicle if you don’t qualify for auto loan financing with bad credit.

Recommended: Getting Out of Your Car Lease Early

The Takeaway

Voluntary vehicle repossession can have lasting financial consequences. Be sure to work with your lender and consider the alternatives available before handing over your car keys. Refinancing could be a good choice to secure a more manageable monthly payment and steer clear of repossession altogether.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Will a voluntary repossession hurt your credit score?

Yes, voluntary repo may cause your credit score to drop if the lender reports your car loan account and delinquency history to the nationwide credit bureaus. Some consumers may see their credit scores plunge at least 100 points.

Is a voluntary repossession better than an involuntary one?

Voluntary repossession may give you more control over the process, which might be better for you than losing your vehicle to involuntary repo. You may also face greater costs if the lender finds and seizes your vehicle through involuntary repo. Any form of repossession can damage your credit score, but a voluntary surrender may cause less damage than an involuntary repo.

How long does a voluntary repossession stay on your credit report?

Lenders may report voluntary repossessions to credit bureaus. This derogatory mark may remain on your credit report for seven years.

Photo credit: iStock/Jinda Noipho

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-063

Auto loan scams can deprive consumers of their hard-earned money. Some of the most common auto loan scams include car title loan scams, change in auto loan term scams, yo-yo financing scams, credit score scams, car loan fee scams, cosigner scams, and guaranteed loan scams.

Auto loan scams can occur online and at car dealerships. Below, learn about some of the most common auto loan scams plus tips on how you can avoid such scams.

What Is an Auto Loan Scam?

An auto loan scam is an unfair, deceptive, or criminal practice that defrauds or takes advantage of car buyers who need financing. Auto loan scams can also target car owners who apply for car title loans. As mentioned above, auto loan scams can occur online and at car dealerships.

Auto loan scams can have a damaging impact on consumers. These scams may result in car owners paying exorbitant rates of interest or being required to return their vehicle while being denied a refund of their down payment.

How Do Car Loan Scams Work?

Car loan scams work by taking advantage of consumers who want to borrow money. Any car owner who applies for car title loans could become a prime target of such a scam, and consumers who need financing to purchase a new or used vehicle could also become a target.

These scams could exploit consumers who may not be aware of their credit scores or aware of any state laws against predatory lending. Scammers may also target consumers who sign auto loan contracts without reading the documents or understanding the terms and conditions.

Auto loan scams can give car dealers unfair leverage over their customers and may cause customers to pay exorbitant rates of interest.

Recommended: Is an Auto Loan Secured or Unsecured?

Car Title Loan Scam

Car title loan scams may exploit motor vehicle owners who borrow money from car title loan lenders. Borrowers in this scam may sign car title loan agreements that include exorbitant rates of interest.

Perpetrators of this scam may impose interest rates exceeding 100% and may seize the vehicle as collateral if the borrower fails to repay the loan in full. At least 32 states plus the District of Columbia cap interest rates at 36% or less for $2,000 installment loan products.

Change in Auto Loan Term Scam

A change in auto loan term scam is an unfair practice in which lenders change the terms and conditions of a loan agreement after a borrower secures financing for a vehicle. Lenders may promise certain terms and conditions when selling the vehicle then later inform borrowers that they no longer qualify for the favorable loan terms.

Lenders who deploy this scam may offer new loan terms calling for borrowers to pay higher rates of interest as a condition of keeping the vehicle. Borrowers who refuse to pay the higher interest rate would be asked to return the vehicle.

Yo-Yo Financing Scam

Yo-yo financing scams occur when consumers buy a vehicle from a dealership that fails to honor the financing agreement. Dealers in this scam may contact borrowers days later and tell them that their auto loan financing application did not go through.

Car buyers in this scam are asked to return the vehicle, and these customers may also be denied a refund of their down payment. After the car buyer returns the vehicle, the lender may ask the customer to consider buying a different vehicle at a higher rate of interest.

Credit Score Scam

A credit score scam occurs when lenders of auto financing give false or misleading information about a consumer’s creditworthiness. Lenders in this scam may tell borrowers that their credit scores are too low to qualify for the best interest rate even if the borrower has good or excellent credit.

Victims of this scam may be unaware of their good or excellent credit scores and therefore might not realize the lender is pulling a scam. Certain credit monitoring services can give consumers access to their credit reports and credit scores.

The way how auto loans work is that banks, dealerships, or private lenders offer a financing plan to help consumers buy a new or used vehicle. Lenders may offer the best rates of interest to consumers with excellent credit, but scammers may ignore creditworthiness when imposing unfair rates of interest.

Car Loan Fees Scam

Here are some car loan fee scams:

Packing Payments

A packing payments scam occurs when dealers inflate the overall price of an auto loan by adding extra products, including supplemental insurance packages, that can provide dealers with additional revenue kickbacks.

Upfront Fees

An upfront fee scam occurs when lenders ask consumers to pay advance fees before processing an auto loan application. Scams like this can occur online, and victims may never receive the loan and may never hear from the lender after paying the advance fees.

Cosigner Scam

A cosigner scam occurs when borrowers apply for an auto loan with cosigner assistance, but the lender ends up putting the entire loan in the cosigner’s name.

A car loan cosigner can help borrowers with poor credit qualify for an auto loan. If approved by the lender, the borrower and cosigner would share the responsibility of repaying the loan.

Guaranteed Loan Scam

The guaranteed loan scam occurs when dealers promise that borrowers will receive auto loan financing regardless of credit history and then offer outrageous terms and conditions for the loan.

A guaranteed auto loan offers financing to all car buyers, including consumers with poor credit. Lenders may charge higher rates of interest on borrowers with poor credit.

Recommended: How to Shop for Auto Loans

Tips for Avoiding Auto Loan Scams

Here are some tips to avoid auto loan scams:

Get Independent Financing

Consumers can avoid dealer financing by shopping around for car loans from independent lenders who may offer preapproved car loans or car loan refinancing.

Know Your Credit Score

Knowing your credit score can help you avoid credit score scams. As mentioned earlier, certain credit monitoring services can give you access to your credit report and credit scores.

Blank Fields on Contract

Blank fields on a contract could signal trouble. Lenders may ask you to sign the paperwork without giving you time to read the contract, and then lenders could later insert language into the blank fields imposing unfair terms and conditions.

Unclear Interest Rate

Consumers can avoid signing auto loan contracts that fail to disclose the interest rate in clear language. A loan contract with an unclear interest rate could be a red flag.

Conditional Loan

Getting a preapproved or conditional auto loan before visiting a car dealership can help you avoid potential yo-yo financing scams. Once you find the car you want, financial institutions may finance the transaction with a fully approved loan agreement.

How Do You Know If You Have Been Scammed?

The following scenarios could point to an auto loan scam:

•  The lender changes the terms of your loan without your consent

•  You’ve paid upfront fees for financing and never received a loan

•  The lender is charging you an exorbitant rate of interest

•  The lender rushes you to sign a loan contract with blank fields

•  You buy a vehicle and the dealer later asks you to return the vehicle or pay higher interest.

Recommended: Car Usage and Ownership Statistics in the U.S.

What Can You Do If You Are a Victim of an Auto Loan Scam?

Victims of auto loan scams can file complaints with their state’s consumer protection agency and the Federal Trade Commission. Consumers with unfair auto loan terms may also file complaints with the Consumer Financial Protection Bureau.

What Should You Do If You Can’t Afford Car Loan Payments?

If you cannot afford making car loan payments, you may contact your lender as soon as possible and ask about possible relief options.

Lenders may be willing to negotiate a loan modification that could extend your repayment term and provide you with a lower and more affordable monthly payment. Refinancing may be an option as well. It’s likely you’d take out a new loan with lower monthly payments, but you’d probably pay more interest over the life of your loan.

If your circumstances change and you can afford to pay off your car loan early, that can improve your debt-to-income ratio and allow you to save on interest payments.

The Takeaway

Lenders who charge exorbitant rates of interest for auto loans could be predatory scammers. Other signs of a scam can include the rate of the loan changing unexpectedly or the lender having you sign a contract with areas that have not been fully filled out. Knowing the signals of a scam and being wary are good steps to take.

Auto loan consumers who cannot afford their monthly repayment obligations may consider auto loan refinance options.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

How to avoid auto loan scams?

Consumers can avoid auto loan scams by knowing their credit scores and seeking preapproved financing from independent lenders before going to a dealership.

How to know if you’ve been scammed?

You may be the victim of an auto loan scam if the lender took advantage of you with an unfair or deceptive practice. One of the signs of a scam is the lender changes the terms of your loan without your consent. Paying upfront fees and getting nothing in return is also a red flag.

What can you do if you are the victim of an auto loan scam?

As mentioned above, victims of an auto loan scam may file complaints with their state’s consumer protection agency and the Federal Trade Commission. Consumers with unfair auto loan terms may also file complaints with the Consumer Financial Protection Bureau.

Photo credit: iStock/erdikocak

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOALR-Q325-062

If you encounter financial difficulties and you’re unable to repay your auto loan, there are ways to get relief from your debt. For instance, you could pursue an auto loan settlement.

But before you go this route, there are some downsides to an auto finance settlement. For instance, a car loan settlement might have a negative impact on your credit score. Weighing the advantages and disadvantages of auto loan settlement is crucial.

What Is an Auto Loan Settlement?

An auto loan settlement is an agreement between you and your creditor that allows you to pay off your car loan for less than the remaining amount you owe. Can you settle on a car loan? Yes. A settlement may become an option when you can’t make regular loan payments.

Recommended: What Is a Private Party Auto Loan?

How Do Auto Loan Settlements Work?

When it becomes clear that you will be unable to pay off your auto loan in full, your lender or a collections agency may come to you with an offer to settle. If you accept the offer and pay off the agreed-upon settlement amount, your debt is settled and you no longer owe any money on the loan.

Creditors and collections agencies may prefer car loan settlement to other options that might be much more time consuming and costly, such as car repossession.

Recommended: Guide to Gap Waiver

Can You Negotiate a Car Loan Settlement?

If you’re looking to get out of your car loan, you may be able to negotiate your car loan settlement amount. For instance, you could draw up a letter that states how much you’re able to pay and outline a payment plan that works for you and take it to the lender or collections agency. They may accept your plan or give you a counteroffer.

Be sure all the settlement negotiations are in writing so you have documentation of them. When a settlement is reached, get the terms of the agreement in writing as well before you send any money to collections or your lender.

Auto Loan Settlement vs Repossession

An auto finance settlement is different from a repossession. When you default on your auto loan, your lender may seize or repossess your vehicle and then sell it to recoup their losses. Or you may even choose voluntary repossession of the car so the lender can sell it.

If there’s a difference between the amount received from the sale of the car and the amount of money left on the loan, that’s what’s known as a deficiency balance. You’re responsible for paying it off. If you’re unable to pay the deficiency balance, you may be able to reach a settlement on the remaining debt with the lender.

Recommended: Can You Refinance Your Auto Loan After Repossession?

Things to Consider Before Settling Your Car Loan

Before you choose to settle your auto loan, there are some important factors to think carefully about. These include:

Impact on Your Credit Score

An auto finance settlement will have a negative impact on your credit score. A settled account stays on your credit report for seven years, and creditors will see that you were unable to pay off your loan. A low credit score can make it more difficult and expensive to secure credit in the future.

You May Avoid Default

Despite the impact on your credit score, settling your loan may sometimes be your best option. Creditors look more favorably on settling a debt than defaulting on a loan. In certain cases, settling your loan might put you on a faster track to rebuilding your credit over time.

You Could Owe Taxes

When a lender agrees to a debt settlement that’s less than the full amount of your loan, you might end up owing money in taxes. The IRS treats this kind of forgiven debt as income. As such, it’s taxed at your normal income tax rate.

If your lender forgives more than $600 in loan principal, they are required to send you an IRS Form 1099-C. Even if you don’t receive a 1099-C from the lender, you’re still obligated to report any forgiven debt amount as income when you file your taxes.

Alternatives to Auto Loan Settlement

Because of the negative impact on your credit score and financial future, an auto finance settlement is generally an option you’ll want to pursue as a last resort. Consider these four alternatives first.

Pay Off the Loan

If possible, the best option is to pay off your loan in full. In doing so, you’ll build your credit, making it easier to secure loans in the future. Perhaps you could borrow money from a family member, for instance, to make the full auto loan repayment.

Modify the Loan

As soon as you see that your loan payments are becoming unmanageable, contact your lender and ask if they can modify the loan to make it easier to pay. The lender may agree to defer your payments for a short time until you can get back on your feet. Or, they might lower your interest rate, extend your loan term, or change the due date of your payments. See what you can work out.

Sell Your Car

If you can no longer afford the loan payments, and public transportation is available, you could sell the car and use the proceeds to pay off your loan.

Refinance Your Loan

Refinancing a vehicle loan allows you to take out a new loan — preferably with a lower interest rate or more manageable terms — and pay off your old loan. A lower interest rate on the new loan will make your monthly payments smaller and reduce the amount you pay over the life of the loan. Extending your loan term may also lower your monthly payments, making them easier on your budget. But be aware that with a longer loan term, you may end up paying more in interest over the life of the loan.

Once your loan application is approved and when the car loan is finalized, the new terms or rates will kick in.

Recommended: 8 Tips on How to Refinance an Auto Loan

The Takeaway

If you can no longer afford to repay your auto loan, there are several options to explore before you consider an auto loan settlement. For instance, modifying or refinancing your loan could help you pay what you owe, while also protecting your credit score and financial future.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can you do a settlement on a car loan?

If you’re no longer able to make your car loan payments, a car loan settlement may be an option to explore to help pay your auto loan debt for less than you owe. Just be sure to weigh the pros and cons of auto loan resettlement first.

Does settling an auto loan affect your credit score?

Settling an auto loan will have a negative impact on your credit score. An auto loan settlement will remain on your credit report for seven years and could affect your ability to get loans in the future.

How long does a car refinance settlement take?

The length of time an auto loan settlement takes varies by lender and other parties that may be involved, such as collections. If you’re in danger of defaulting and you think an auto loan settlement is your best option, reach out to your lender to start the process as soon as possible.

Photo credit: iStock/Jinda Noipho

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-061

Buying a new or used car with an auto loan always requires you to make principal payments over a set term. The principal is the amount of money you borrow to finance the purchase of your vehicle. Paying the principal on a car loan can be done on a monthly basis over the life of the loan.

You must pay down the principal and cover any finance charges owed on your car loan. Auto loans can come with fixed interest rates that never change or variable interest rates that can fluctuate over the life of your loan.

Car loans can have short terms under 48 months or longer terms approaching or exceeding 144 months. Financing the purchase of a car with auto lending generally requires you to repay your principal and any finance charges over a set term.

You may have the option to reduce your overall interest costs by making extra car loan payments toward principal. Below learn the difference between paying down principal vs. paying down interest.

What Is Principal Balance on a Car Loan?

The principal balance on a car loan is the total amount of money you owe in principal and doesn’t include finance charges or late fees. For example, getting $40,000 in financing under a 60-month car loan begins with an outstanding principal balance of $40,000. In a typical car loan, the principal balance would shrink with each monthly payment you make on the loan.

Car loans generally include a car loan amortization payment schedule. This means borrowers are generally required to make minimum monthly payments over the life of the car loan. Monthly repayments may go toward principal, interest, and fees. Making extra payments toward principal can reduce the amount of interest you pay over the life of your loan.

For example, the minimum monthly payment on a $40,000 car loan with a 60-month term and 7% simple interest rate is about $792. Paying that amount for 60 consecutive months would result in you paying $40,000 in loan principal and about $7,523 in interest by the 60th payment. Paying an extra $10 per month, however, would result in you paying $40,000 in principal and saving $115.92 in interest over the life of the loan.

Can I Pay the Principal on My Car Loan?

One of the obligations of a car loan is that you repay the principal in full plus any interest charges and fees that might apply. The principal is the amount of money you borrow to finance the purchase of a new or used car.

If you have a $40,000 car loan with a 60-month term and 0% annual percentage rate (APR), you would be expected to repay $40,000 by the end of the 60-month term. In this example, you could satisfy the debt by making 60 monthly payments of $666.67.

The way how a car loan works is you borrow money from a lender, purchase a vehicle from a seller, and then repay the loan over a set period under the terms and conditions of an auto financing agreement. Car loans typically have a simple interest rate rather than a precomputed rate.

Recommended: What Is the Average Credit Score to Buy a Car?

Will My Car Payment Go Down If I Pay Extra?

Your final car payment may go down if you pay extra toward principal. For example, a $25,000 car loan with a 60-month term and 6% simple interest rate would include a $483.32 monthly payment obligation. The 60th and final payment on that loan would be about $139 if you’re allowed to make a recurring $5 extra payment each month toward principal without penalty.

Consider the following points:

•   You may have the option to make extra payments on a car loan with no prepayment penalty.

•   Some lenders may allow you to designate your extra payment as principal only.

•   Making extra payments toward principal can reduce your total interest costs over the life of the loan.

•   Your final car payment may go down if you pay extra each month.

Paying the principal on a car loan with ordinary and extra payments can minimize your interest charges and allow you to get out of debt faster. Some car loans, however, may include precomputed interest charges. Making extra payments on a car loan with precomputed interest is generally not as beneficial as making extra payments on a car loan with simple interest.

The interest on a precomputed loan is calculated upfront when the loan is made, whereas interest on a simple-interest loan typically accrues daily on your outstanding principal balance. Making extra payments on a simple-interest loan can therefore generate more savings than making extra payments on a precomputed loan.

You may be entitled to a refund if you pay off your precomputed interest auto loan early. The refund, however, is typically lower than what you might have saved if the loan had charged daily simple interest on your outstanding principal balance.

Making extra payments might make the most sense if your lender charges daily simple interest. In general, less interest will accrue over the life of your loan if you pay extra on a simple-interest loan.

Recommended: Auto Loan Refinance Calculator

How to Pay Principal on Car Loan

Borrowers may have different options for paying the principal on a car loan. One option is for the borrower to simply repay the loan in accordance with the loan payment schedule. Making the minimum required payment amount each month will allow you to fully repay the principal loan amount by the final scheduled payment date, aka the loan maturity date.

Another option borrowers may have is to make extra payments above and beyond the required payment amount each month. As mentioned earlier, some lenders may allow borrowers to designate an extra payment as principal only. Making extra payments toward principal can reduce simple interest charges over the life of your loan.

Borrowers may also have the option of paying off the car loan early without incurring any prepayment penalties. For example, a borrower with a 60-month car loan could pay off the remaining loan balance well before the 60th payment date. Paying the loan off early may minimize the amount of interest you pay on a simple-interest car loan.

You can also pay off the principal loan amount with auto refinancing. Consider the following points:

•   Refinancing pays off your original loan agreement and replaces it with new loan terms.

•   You can refinance auto loans almost immediately.

•   The best time to refinance the automobile may be whenever you can secure a lower interest rate or whenever you need a lower monthly payment.

•   The cons and pros of automobile refinancing are something you may consider when evaluating whether to seek an auto loan refinance.

•   The cost to refinance auto loan obligations may include a number of fees that can be a dealbreaker for some consumers.

Refinancing an auto loan can help borrowers get a lower interest rate, but lowering your monthly payment by extending your loan term could increase your total interest costs. Auto refinancing may also cause your credit score to temporarily dip by several points if the refinance company checks your credit report with a hard inquiry.

Recommended: Most Expensive Car Repairs

Paying Down Principal vs Paying Down Interest

The table below compares paying down principal vs. paying down interest:

Paying Down the Principal vs Refinancing Your Car Loan

The table below compares paying down car loan principal vs. refinancing your car loan:

Is It Better to Pay the Principal or Interest?

Borrowers who can afford to pay extra principal on a car loan may find that better than paying maximum interest charges. If you have a car loan with simple interest, paying extra principal may minimize your total interest costs over the life of the loan.

As mentioned earlier, the minimum monthly payment on a $40,000 car loan with a 60-month term and 7% simple interest rate is about $792. Paying that amount for 60 consecutive months would result in you paying $40,000 in loan principal and about $7,523 in interest by the 60th payment. Paying an extra $10 per month, however, would result in you paying about $7,407 in interest over the life of the loan as well as having a significantly smaller final payment, one that’s less than $100.

In some cases it might be better for you to make minimum payments on the car loan and nothing extra. Some lenders, for example, may charge a prepayment penalty if you pay off the car loan early. What’s best for you may depend on the terms and conditions of your loan agreement and your personal financial circumstances.

Here are some points to consider:

•  Lenders may have specific car loan requirements requiring borrowers to provide proof of identity and proof of income when applying for financing.

•  In terms of how to save money on a car, making larger down payments can reduce your monthly payment obligations on a car loan.

•  A private party auto loan can provide you with financing to buy a used vehicle from a private person selling a car.

•  Banks, credit unions, and nonbank financial institutions may offer different types of car loans.

Auto leasing is another financing option you may consider if you need access to a new car. When considering the option of leasing vs. buying a car, you could lease a vehicle through a standard three-year contract with a leasing company. A car lease typically includes a lower monthly payment than auto loan financing.

Recommended: Guide to RV Refinancing

The Takeaway

Paying the principal on a car loan is required whenever you borrow auto financing. You can make minimum payments each month or extra payments to pay off your debt early.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can you pay down the principal of a car loan?

Yes, you can pay down the principal on a car loan in several different ways. One way is to simply pay the monthly payments as scheduled. Another way is to make extra payments toward the principal, which can minimize your interest costs if the lender permits. You may also have the option to pay the loan off early or refinance your existing loan agreement with a different lender.

Is it better to pay the principal or interest?

Borrowers who can afford to make extra payments on the principal may find that better than paying maximum interest charges. Paying the principal can help you get out of debt. If you have a car loan with simple interest, making extra principal payments can minimize your interest costs over the life of the loan.

Will my car payment go down if I pay extra?

Your final car payment may go down if you pay extra toward principal. For example, a $25,000 car loan with a 60-month term and 6% simple interest rate would include a $483.32 monthly payment obligation. The 60th and final payment on that loan would be about $139 if you’re allowed to make a recurring $5 extra payment each month toward principal without penalty.

Borrowers are expected to repay the principal loan amount in full. You can pay the loan off faster and minimize your interest costs by making extra payments toward the principal.

Photo credit: iStock/Kanizphoto

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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When people are looking for a new vehicle, they often weigh the pros and cons of an auto loan vs a lease.

Here’s one key benefit of a leased car: You’ll usually have a lower monthly payment because you aren’t paying for the full value of the vehicle. In a sense, leasing a vehicle is like renting it, usually for a period of two to four years.

If you’re looking at leasing for the first time, you’ll quickly see how this process comes with its own procedures and lingo. And one of its unique terms is a “car lease acquisition fee.” This is also known as a car acquisition fee or an assignment, administrative, or origination fee.

This article will provide you with helpful information about leasing a vehicle, including how you may be able to negotiate the amount of the car lease acquisition fee.

What Is an Acquisition Fee?

An acquisition fee is a fee charged by a lender to originate your lease or loan. Because of this, sometimes it’s also referred to as an origination fee. Acquisition fees can include both car acquisition fees and real estate acquisition fees.

Recommended: Should I Pay Off My Car Before Traditing It In?

Car Acquisition Fees

There are often various finance charges when you set up a car lease. A car acquisition fee is a fee that’s charged by the organization leasing the vehicle to cover the administrative costs of setting up the lease. These costs can include the pulling and reviewing of credit reports, the verification of car insurance, the creation and signing of paperwork, and so forth.

It’s important to remember that this fee covers only the administrative/document costs associated with setting up the lease, not all costs. There may also be a disposition fee that covers the dealer’s costs at the end of the lease period, for example.

You may be wondering whether all leasing companies charge this fee. Car dealerships do have a significant amount of leeway when crafting their leases, so it’s possible that you could find one without this charge. That said, car lease acquisition fees are widely used in the industry, so it may be challenging to get a dealer to eliminate it unless you’re willing to give up something else in return.

Note: You typically will not pay an acquisition fee when refinancing a car loan.

Real Estate Acquisition Fees

A real estate acquisition fee is a fee you pay when you purchase property, such as a home or commercial property. Similar to car acquisition fees, real estate acquisition fees cover the expenses charged from arranging a property lease or lean agreement, including closing costs, underwriting, real estate agent commissions, and more.

If you’re closing on a property, expect to pay a 1%-2% real estate acquisition fee, though in some cases it could be as high as 5%. In most cases, the larger the deal, the smaller the percentage the real estate acquisition fee will be.

Recommended: Can You Refinance a Car Loan With Bad Credit?

How Much Are Acquisition Fees?

Car acquisition fees are typically a few hundred dollars but can be more than $1,000. Automotive resource Edmunds.com, for example, shares that the fee typically ranges between $595 and $1,095, depending upon the leasing company and the vehicle chosen.

Overall, a more expensive vehicle tends to come with a higher fee. A luxury vehicle typically has a bigger one than a more utilitarian vehicle, for instance.

These fees can be paid upfront or a portion of the overall fee can be added to each monthly lease payment (more about that choice later).

Does Your Loan Have an Acquisition Fee?

As you read through your lease paperwork, keep an eye out for mentions of this fee and its amount, including in any fine print.

If you don’t see anything or you want clarification, simply ask the dealer or lender you’re working with about the presence and specifics of this fee. Lenders are legally required to disclose fees.

Recommended: Can I Have Multiple Car Loans?

Can You Negotiate Lease Buyout Dealer Fees?

As a lessee (a person leasing a vehicle), you can ask to negotiate just about any part of the process, including the car lease acquisition fee. The lessor (leasing company) may be willing to negotiate — or it may not.

If it does agree to lower this particular fee, it may boost your interest rate (also called the money factor, lease rate, or lease factor). That means that lowering the acquisition charge may or may not end up resulting in a better deal for you overall.

It can make sense to check with multiple leasing companies to see which one will negotiate the car lease acquisition fee in the most favorable way for you.

If you aren’t able to negotiate this specific fee, there are other methods of negotiating a car lease, from tweaking the vehicle’s valuation to reducing or eliminating other charges and fees.

So, don’t get too hung up on this specific negotiation. Instead, work to get the most favorable agreement overall.

Once you sign a lease contract, of course, negotiations are over. Be sure to determine that you’ve gotten the best lease that you can before you close on the deal.

Recommended: Guide to Car Loan Interest Rates

Paying Acquisition Fees

There are two main ways lessees can pay this fee: upfront in a lump sum or as part of their monthly car loan payments.

If you decide to make it part of your payment, the fee will be added to the principal amount of the lease with payments calculated on that larger principal amount.

For example, if you have a $30,000 lease and a $700 acquisition fee, you can pay the $700 when signing the lease documents and have your payments figured on $30,000, or you can have a lease amount of $30,700 with monthly payments calculated on that figure.

Which is better?

By adding the fee to the principal amount, you’d pay more overall because of compound interest.

Having said that, if the vehicle is involved in a significant accident (to the point that it’s totaled), you wouldn’t be refunded any of the car acquisition fee if you’d paid it upfront.

If your acquisition charge is included in the monthly payment, though, and the payments stop because a vehicle was totaled, you wouldn’t end up paying the full fee.

No matter how you end up paying this charge, if all goes well with the vehicle, you may decide to purchase it through what’s called a lease buyout. That means that when the lease period has ended, you buy it at the predetermined price listed in your leasing agreement. Note that, in some cases, a lease agreement may prohibit this option. So, if you may want to buy the vehicle at the lease’s end, make sure the language in your agreement reflects that option.

Recommended: Getting Out of a Car Lease Early

The Takeaway

Benefits of leasing a car can potentially include getting a lower monthly payment. Then, if you can successfully negotiate aspects of the lease, such as the car lease negotiation fee, you can improve upon the dealer’s initial offer to get an even better deal with your lease.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is an acquisition fee negotiable?

Yes, an acquisition fee may be negotiable. When leasing a car, it’s best to negotiate with the dealer to get the best deal, which may or may not include asking them to waive or lower the car lease acquisition fee.

Can acquisition fees be waived?

In some cases, yes, the acquisition fee may be waived. However, lenders will oftentimes raise the interest rate when waiving fees, so it’s always best to look at the fine print and figure out which option will get you the best deal.

What is a typical acquisition fee in real estate?

A typical acquisition fee in real estate is 1%-2% of the purchase price of the property, although it could be as high as 5%. Like car acquisition fees, this fee includes the costs incurred to originate your loan or lease, and it may be negotiable.

What is a reasonable acquisition fee?

The average car acquisition fee ranges from $595 to $1,095.

Photo credit: iStock/Mariia Vitkovska

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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