Financing a car can be a big financial commitment, averaging hundreds of dollars a month. And with vehicle prices rising sharply after the Covid-19 pandemic, owning a new car can be costly.
But there are ways to help lower your monthly car payments that can bring more immediate relief to your financial budget.
5 Ways to Lower Your Car Payment
If you’re struggling to keep up on payments—or would like more room in your budget you have a few options to lower your car payment.
1. Provide a Larger Down Payment
One way to ensure you don’t end up with a large monthly payment when you finance a car is by paying more money up front. A larger down payment means you don’t have to borrow as much, allowing for lower monthly payments during the life of the loan. Plus, the less you borrow, the lower you will also pay in interest.
Here’s an example: Say the car you’re interested in costs $35,000 and you put 10% down, $3,500. If you secured a five-year auto loan with a 3% APR, your monthly payments would be $566.01 and you’d pay a total of $2,460.83 in interest. Now, if you put 20% down, or $7,000, on that same car and loan, your payment would drop to $503.12 per month and you’d save $273.43 in interest over the life of the loan.
Related: Auto Loan Payment Calculator
2. Lump-sum Payments on the Loan
At first, it might seem the opposite of your goal to lower car payments, but any time you are able to pay a larger portion on your auto loan, above the minimum monthly payment required, it will reduce your monthly payments in the end. For example, if you have some extra savings or received a refund on your annual tax return, putting that towards an extra payment on your auto loan will lower the overall balance, and the interest amount charged since it’s based on the loan balance. This can also help you pay off the loan faster.
3. Refinance Your Loan
Refinancing your auto loan involves taking out a new loan with different terms and using the funds to pay off your existing loan. Usually, borrowers refinance in order to secure a lower interest rate, which means you will have smaller monthly payments.
If interest rates have come down since you took out your car loan, or your credit score has improved, there’s a good chance you can refinance to a better rate. This can not only result in a lower monthly payment but also save you money in interest charges over the life of your loan.
Lowering your rate even by a couple percentage points can help. For instance, say your existing car loan has a balance of $20,000 and an interest rate of 6%, with three years left to pay it off. If you refinance to 4% and keep the rest of the terms the same, you could lower your payment from $608.44 to $590.48, and cut $646.52 in total interest.
Another option is to refinance to a longer payment term. By stretching out your repayment period, you can lower your monthly payment. But keep in mind that by taking longer to repay your loan, you end up paying more in interest over time.
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4. Talk With Your Lender
If you’re having trouble making your car loan payments, it’s important to loop in your lender right away. They may be able to work out a short-term plan to help you get back on track.
For example, if you hit a temporary setback, your lender might let you defer a payment or two. That means you don’t have to pay the current month, and it gets tacked onto the end of your loan. Keep in mind that interest will accrue on that higher balance, but a deferral could give you the breathing room you need to catch up.
After all, your lender would prefer to have the loan repaid rather than letting you default, in which case they could repossess the vehicle.
5. Trade-in Your Car for Cheaper Vehicle
Finally, if you can’t afford your current payments, it may be a good idea to downsize.
One option is to trade in your vehicle to the dealership, subtract the payoff balance and purchase a cheaper vehicle. Trading in a car is a convenient option since you don’t have to worry about listing it privately and negotiating with potential buyers. However, you might not get the best value. Instead, you can expect to get the wholesale value.
Alternatively, you can sell it privately which will likely fetch a higher price. But you’ll also need to set up your own advertising and be ready for haggling with potential buyers. If you still owe on your existing car loan, you’ll need to make sure the loan is paid off in the process.
How to Lower Payments When Purchasing the Car
If you’re still in the market for a new car, the choices you make now can impact how affordable or expensive your car loan is for years to come.
Be sure to shop around and get quotes from several lenders. While your credit score and other personal financial details play a key factor in the interest rate and terms of the loan, some lenders will be able to offer better deals than others.
Keep in mind that you can often get an initial quote online without the lender doing a hard credit check that can impact your credit score. However, that’s just an estimate of what you might qualify for based on those initial details.
You can’t lock in an offer until you officially apply for a loan, which involves a hard credit check that has a temporary negative impact on your credit score. But if you apply with several lenders try to do so within a short period of time.
Modern FICO scoring models recognize that several mortgage or auto loan inquiries over a short period mean you’re rate shopping, so it won’t hurt your score as long as you keep it to a 45-day window. VantageScore and some older FICO models require you to rate shop within a two-week period.
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