How to Lower Your Car Payment

A monthly car payment can take a bite out of your budget. Check out these tips on how to keep it on the low side.

For many of us, a car will be the second most expensive purchase (after a home) we ever make. And the majority of us will finance that automobile purchase with a loan, which means having a car payment. Depending on how much of the car’s purchase price you finance, the term length of the loan, and how long you keep the car, this could mean years of making a monthly car payment.

A car payment can take a significant bite out of your monthly budget. But there are ways to keep that payment down or, if you already have a car loan, to lower it.  

Ways to Keep a Car Payment Down

If you’re shopping for a car and plan on financing some or all of your purchase, doing any of the following could help keep your car payment lower and more manageable:

1. Purchase a Lower Priced Car: While it is possible to have a significant car payment on an inexpensive car—you make a small down payment, pay a high interest rate, or have a short loan term length—if you’re financing a significant portion of a car purchase, you can typically expect to pay more each month for a more expensive car. That’s simply because you’re paying off a larger balance. So, if you’re considering buying a $25,000 car or a $35,000 car, and you plan on making the same down payment on either and financing the balance at the same interest rate and same loan term length, you’ll be paying off a larger balance with the $35,000 car. All other things being equal, that larger balance translates into a bigger monthly car payment.
2. Make a Larger Down Payment: The more you pay up front, the lower the balance you’re financing with a car loan. So, if you purchase that same $25,000 car with the same loan from #1, your car payment will be lower if you make a $5,000 down payment than if you make a $2,000 down payment. That’s because you’re financing an amount that’s $3,000 less in the first case ($20,000 vs $23,000). 
3. Take Out a Loan with a Lower Interest Rate: A lower interest rate means less interest charged, which can lower your monthly car payment. It also means that you’ll end up paying less total interest (and less for the car) than on a loan with the same balance and term length but a higher interest rate.  
4. Take Out a Loan with a Longer Term Length: If you have five years to pay back a $20,000 loan versus three years to pay back that same amount at the same interest rate, your monthly payment should be less on the five-year loan. While this may make your monthly payment more manageable, it’s important to understand that the total amount you’ll pay for the car will be greater with the longer-term-length loan.        

Ways to Lower an Existing Car Payment

If you already have an auto loan and are looking to reduce your monthly payment, consider these options:

1. Pay Off the Auto Loan: Doing this should effectively reduce your monthly loan payment to $0. Depending on the balance owed, it may not be easy, though. So, if you don’t have the money, consider other possibilities. Can you use a tax refund to pay it off? Can you borrow from a friend or family member to pay it off? Can you sell the car, pay off the loan, and find cheaper transportation? Also, it’s important to know if your auto loan has any prepayment penalties. If it does, and the penalty you’ll be assessed for paying off the loan early exceeds the amount you’ll save by doing so, it may not be worth it.
2. Negotiate with Your Current Lender: Your lender may be willing to lower your interest rate or extend the loan term length—especially if you can make a compelling case why they should. Maybe your financial situation has changed, or perhaps your credit score has improved. Just keep in mind that your lender is under no legal obligation to do so. Still, it never hurts to ask, and the worst they can do is say no, which means your situation stays the same as before you asked.       
3. Refinance Your Auto Loan: Refinancing an auto loan is similar to refinancing a mortgage, only it’s for an automobile instead of a home. Essentially, you replace your existing auto loan with a loan that typically offers more favorable terms. Your refinance could be with your same lender or it could be with a completely new lender. Of course, how you define “more favorable terms” depends on your objective. If your objective is to lower your monthly car payment and the principal owed will stay the same with a refi, that can be achieved by lowering the interest rate, extending the term length of the loan, or a combination of the two.

While refinancing the remaining balance of a car loan may lower your monthly car payment, it won’t necessarily save you money. Let’s say that your current loan has 24 months remaining on a balance of $10,000 at an interest rate of 5%. If you refinance that $10,000 at an interest rate of 3% for the same 24-month term, your monthly car payment should go down and you should save money on the total amount paid for the car. However, if you refinance at the same 5% interest rate and simply extend the length of the loan from 24 to 36 months, your monthly payment should go down but the total amount you pay for the car should increase because you’re now making car payments for an additional 12 months. If you both reduce the interest rate and extend the length of the loan, your monthly payment should go down, but the total amount you pay for the car could go up, down, or stay the same. It all depends on whether the money you save by having a lower interest rate is greater, lower, or the same as how much additional interest you’ll pay because of the increased term length of the loan.

Things to Consider Before Refinancing

As mentioned, perhaps the number-one thing to consider in deciding to refinance an auto loan is how much you’ll save—or how much more you’ll pay—by doing so. A lower monthly payment may be desirable, but if it’s achieved by paying a higher total price for the car, is it actually worth it?

There may be fees associated with refinancing, such as the aforementioned prepayment penalty. If you refinance with another lender, they pay off your existing loan. If there’s a penalty for paying off that loan early, you will be the one responsible for paying that fee. There may also be other fees associated with refinancing, such as lender or title fees.

If you owe more money on your existing loan than the car is actually worth, you may have difficulty finding a lender willing to refinance your loan. This is called being “upside-down on your loan.” It’s not impossible to refinance an upside-down loan, but it will likely be more difficult to procure refinancing than if your car is worth more than what you owe on it.

Also, be aware that, when you apply for auto refinancing, your credit score could take a hit if and when the lender does a hard inquiry to your credit reports. Some lenders may offer an option to see if you pre-qualify for refinancing your loan, which could help cut down on the number of hard inquiries made to your credit reports.  

If you’re concerned with a car payment eating up too much of your monthly budget—or you’re looking to reduce an existing car payment—there are preventative measures as well as steps you can take after signing up for a loan to make your payments more manageable. Just be sure to do your homework and crunch the numbers to ensure that any actions you take make solid fiscal sense.