How To Lower Your Car Payment

If you’re having trouble paying your bills because of a high car payment, or just want a way to keep more money in the bank, you may find ways to lower your car loan payment.

High auto loan payments can take a big bite out of your bank account. Sometimes, they can be the difference between maintaining a budget and financial hardship. This post explores ways to obtain a lower monthly payment if you already have an existing loan as well as how to put yourself in a better financial situation if you’re thinking about applying for a new loan.

Ways to lower your car payment

You may feel stuck with your current car loan payments, but you may be able to reduce how much you pay each month by adopting one or more repayment strategies. We’ll walk you through some solutions to lower your payment in the next sections. Some of these solutions apply to new car loans while others work with existing loans.

Negotiate with your lender

You can take a direct course of action by discussing with your lender how your current car loan impacts your financial situation. If you’re having trouble making your next payment, see if your lender may be willing to:

• Adjust to a new due date to buy you a little time.
• Defer a few payments, penalty free, to give you a cushion.
• Work out a new payment plan to get you back on track.^[1]

With these options, you may maintain your credit rating better than the alternative — having a late payment show up on your credit report.^[1]

Refinance your loan

Refinancing your car loan may help you save money by securing a lower interest rate, but extending the loan term will cost more interest.^[1] An auto refinance loan may give you a lower rate if your credit has improved since you took out your original loan. You may also be able to get better terms if you refinance with a cosigner who has good credit.^[2]

• Before you start looking at refinancing options, keep the following ideas in mind: A longer loan term may increase the total amount of money you pay over time because of added interest.
• Your current loan may have a prepayment penalty, so check your loan contract or with the lender directly to see if refinancing triggers a penalty.
• If your car has more than 100,000 miles on it, lenders aren’t likely to refinance the loan.^[2]

Sell or trade in your current car

Selling your car can give you cash that may help you pay off your loan. Then with your loan paid off, you can purchase a cheaper car with a lower payment. Although selling your car takes some legwork, such as placing ads and setting up appointments with potential buyers, you may get more money than you would by simply turning your car over to the dealership as a trade-in.

If you owe more than your car is worth, though, you may not be able to pay off your entire loan. In this case, you’d need to pay the rest of what you owe out of pocket before you can transfer the car’s title to the buyer. This can be a complicated process.^[3]

On the other hand, trading in your vehicle to a dealership may bring you one step closer to a lower car payment. By turning your car over to a dealership for a less expensive car, you may lower your monthly payment just by financing the lower price.^[3]

Lease a car instead

If you sell or trade in your car, you might consider leasing one instead. If you lease a car, you may enjoy many advantages:

• You may spend less on monthly payments than you would with a purchase.
• You won’t have to worry about the car depreciating in value because you won’t own it.
• You can simply turn the car back in to the dealership once the lease is over and not have to worry about selling it yourself.
• You may have fewer repair expenses because you will be leasing a new vehicle with a warranty.^[4]

On the other hand, you won’t have the opportunity to sell the car for cash once the lease is over. You also may be subject to mileage limitations, and you won’t be able to modify the car, such as giving it a new paint job, since it won’t belong to you.^[4]

What to know before applying for a car loan

If you haven’t taken out a car loan yet, you can take steps over a period of time to prepare yourself. You can start by getting your finances in order, shopping around, and checking for the best terms with various financial institutions.

Set a budget for yourself

Creating a budget can help you determine how much you can afford to spend on your next car. If you know how much money you’re taking in each month, and how much you’re spending on other items, you can figure out how much you can afford in car payments.

You can find a number of auto loan calculators online to help you estimate your monthly car payments based on factors such as your loan amount, estimated annual percentage rate (APR), and the length of your loan.

Shop around for car loans

You can get car loans from financial institutions such as banks or credit unions or from dealers themselves. Lenders have their own criteria for setting interest rates and other terms. So shopping around and comparing rates offers you a better chance of finding loan terms that suit your financial situation.^[5]

Auto lenders base their criteria on several factors, such as your credit score and credit history (expect to pay more if you have bad credit), your debt-to-income ratio (DTI), and the length of your loan. They may also offer incentives for buying a new vehicle that aren’t available for the purchase of a used car. Take all of these factors into consideration when deciding what option works best for you.^[5]

Make a larger down payment

The more money you put down, the less you’ll have to pay each month because your loan will be smaller, and you also can shorten your loan term by paying more up front. In addition, you may get a better interest rate on a shorter term loan.^[6]

In general, you may shave about $20 off monthly payments for each $1,000 you put down, based on a 5% APR. Experts typically suggest a 20% down payment, but you can put down more if you have the money.^[6]

Apply for a loan preapproval

If you’ve been preapproved for a loan, the lender has already checked your credit and verified your information. Because you’ve been approved for a specific-size loan, you’ll know what cars you can afford to buy.^[7]

Getting preapproved for a loan can give you added leverage in negotiating with a dealership’s financing office. You might be able to obtain a lower interest rate because dealerships will work with multiple lenders to find the best possible terms. You may also be able to get a longer loan term.^[7]

Improve your credit score

Improving your credit score can help you obtain better terms and a lower APR on your car loan. Typically, the better your score, the lower your interest rate.^[5] Before you apply for a loan, you can take steps to boost your credit by:

• Getting paid up on past-due accounts
• Paying down your credit cards
• Limiting applications for new credit
• Making on-time payments for any credit or loan balances
• Keeping credit accounts open so that the average age of your credit remains high^[8]

What happens if you stop making car payments?

If you fail to make a car payment by the due date, your lender will consider your account to be delinquent, which may trigger a late fee as well as attempts by the lender to collect the payment. In some cases, lenders may give you a grace period such as 15 days, during which you can still make a payment and get current on your account without any consequences. After 30 days, however, a late payment will be reported to the three major credit bureaus and will appear as a negative mark on your credit report.^[9]

Potential consequences if you stop making car payments can range from late fees all the way up to repossession.

• Car repossession: If you default on a car loan, the lender may take steps to repossess it. This can happen at any time, without notice.^[10] Some lenders may wait 90 days or more after a missed payment before taking this step, while others may act sooner.^[9]
• Damaged credit score: Your payment history accounts for 35% of your FICO® score, making it the biggest single factor in determining your score. As a result, late payments can have a major negative impact on your credit score.^[11]
• Late fees: Lenders may increase your financial burden by charging you a late fee if you miss a payment. The amount of such fees, and whether they are assessed, is determined by the lender, your purchase agreement, and state law. ^[12]
• Lenders send your account to collections: After delinquency, your lender will consider your account in default, and each lender sets its own timeline for when that occurs. At that point, your lender may try to collect through it’s in-house collections team or will sell your account to a collections agency, which will then try to collect what you owe.^[9]
• Deficiency balance: A deficiency balance is what you may still owe even after your car is repossessed. Lenders will sell your repossessed car at auction to try and recoup what you owe. If the lender cannot recoup that amount, you are responsible for that deficiency balance, and a collections agency will work to collect it.^[9]

Should you pay off your car loan early?

Paying off your car loan early may be a good idea if you want to save money by paying less in interest and avoid being underwater. While not typical, some lenders, however, may charge prepayment fees. So look at your contract so you can see whether those might be triggered and how much they might cost you.^[2]

The more you can pay on your car up front, the less you’ll owe in interest over the term of your loan and your monthly payment should be lower. While it will cost you more up front, you will have more money at your disposal for other monthly payments. If you think you’re paying too much, consider options, such as negotiating with your lender or refinancing your loan.

You have strategies at your disposal for lowering your car payment. The next step is to decide which, if any, are right for you.

Sources

1. Experian. “Can’t Afford Your Car Payment? Here’s What to Do,” https://www.experian.com/blogs/ask-experian/what-to-do-if-you-cant-afford-your-car-payments/. Accessed on May 26, 2022.
2. Forbes. “How To Refinance Your Car Loan,” https://www.forbes.com/advisor/auto-loans/how-to-refinance-car-loan/. Accessed on May 26, 2022.
3. Consumer Reports. “Pros and cons of trading vs. selling your car,” https://www.consumerreports.org/cro/2012/12/pros-cons-of-trading-vs-selling/index.htm. Accessed on May 26, 2022.
4. Experian. “Buy or Lease a Car: Which One Is Best?” https://www.experian.com/blogs/ask-experian/should-you-lease-a-vehicle-or-buy/. Accessed on May 26, 2022.
5. Experian. “What Auto Loan Rate Can You Get With Your Credit Score?” https://www.experian.com/blogs/ask-experian/auto-loan-rates-by-credit-score/. Accessed on May 26, 2022.
6. CapitalOne. “What are the Benefits of Putting a Down Payment on a Car?” https://www.capitalone.com/cars/learn/getting-a-good-deal/what-are-the-benefits-of-putting-a-down-payment-on-a-car/1013. Accessed on May 26, 2022.
7. Forbes. “What Is An Auto Loan Preapproval? And How To Get It.” https://www.forbes.com/advisor/auto-loans/auto-loan-preapproval/. Accessed on May 26, 2022.
8. Experian. “How to Improve Your Credit Score,” https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/. Accessed on May 26, 2022.
9. Experian. “How Bad Is It to Default on a Car Loan?” https://www.experian.com/blogs/ask-experian/how-bad-is-it-to-default-on-a-car-loan/. Accessed on May 26, 2022.
10. Federal Trade Commission. “Vehicle Repossession,” https://consumer.ftc.gov/articles/vehicle-repossession. Accessed on May 26, 2022.
11. MyFico. “What’s in my FICO® scores?” https://www.myfico.com/credit-education/whats-in-your-credit-score. Accessed on May 26, 2022.
12. Consumer Financial Protection Bureau. “When are late fees charged on an auto loan?” https://www.consumerfinance.gov/ask-cfpb/when-are-late-fees-charged-on-an-auto-loan-en-839/. Accessed on May 26, 2022.

About the author

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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