How to Lower Your Car Payment

It can be difficult to keep up with a high car payment. In the first quarter of 2023, the average monthly payment on a new car was $725, up $300 since 2019. In fact, the number of borrowers paying $1,000 or more each month has tripled. If you find yourself drowning in auto loan debt, consider these steps to lower your car payment.

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1. Refinance your car

Refinancing your car loan is one of the most common ways to secure a lower monthly payment. If your credit score has improved since you took out the original loan, you may be able to qualify for lower rates and save money on interest. Apply to multiple refinance lenders and shop around for the best rates, terms and amounts. Use an auto refinance calculator to estimate how much you’ll pay each month and what a new loan may cost you overall.

During the auto loan refinance process, you’ll need to provide your vehicle identification number (VIN), make, model, year and registration number of your car, plus information on your current loan — the name of your lender, loan account number and loan balance.

2. Renegotiate for a longer loan term

Another way to use an auto loan refinance to reduce your monthly payments is to select a longer loan term. Keep in mind, though, that a long loan term will end up costing you more money in the end since you’re paying interest for a longer period of time. In some cases, you may be able to negotiate with your current lender to extend your loan term without refinancing.

While it’s generally best to avoid long loan terms, it might be the best option if your budget is tight and you need to reduce the amount you owe each month. Consider offering extra payments if you have the available funds to pay your loan off faster. Use an auto loan calculator to compare how different loan terms will affect your total loan cost.

3. Make extra payments

Making extra payments to pay your car loan off faster can help lower future monthly payments or even allow you to skip them altogether. While most lenders direct any extra payments toward interest, you may be able to pay on the principal of the car loan instead.

When you pay off your car loan early, you may have to pay a prepayment penalty — this is a fee some lenders charge, since they’ll lose out on the full amount of interest they expected to receive. Be sure to review your auto loan contract before paying it off early to be sure you won’t get stuck with a prepayment penalty.

4. Trade your car in or sell it

If you need to reduce the amount you pay each month, consider trading in your car or selling it. By trading in your current vehicle, you can use it as a cashless down payment for a more affordable car. When it comes to trading in versus refinancing a car, the best option will depend on your credit score and whether you have the capital to save up for a down payment.

While selling a car to a dealership may be more straightforward, you’ll make more money if you sell it to a private party. You can use the money you receive as a down payment or to buy a new car entirely with cash. However, selling a car when you still have a loan can be complex, so be sure to do your research ahead of time.

How to get a low car payment before you buy it

The most effective way to get a low car payment is to be sure you can easily afford the auto loan before you drive the car off the lot. Here are some steps you can take to avoid a high car payment.

Choose an affordable vehicle

You can calculate how much you can reasonably afford to pay for a car by using the 20/40/10 rule. To apply this guideline, you should offer a 20% down payment, accept a term of no more than four years and spend less than 10% of your monthly income on transportation costs.

You can also save money if you buy a used car versus a new car. While new cars may come with more bells and whistles and better financing options, used cars tend to be less expensive overall.

Apply for a long-term loan

If you want a low monthly loan payment, ask for a long repayment term. Auto loan terms commonly get as high as 84 months, though some lenders may offer even more time to pay off your loan.

Since long loan terms may cost you more in interest over the life of the loan, be sure to compare different repayment lengths before signing on the dotted line. Taking on a lower monthly car payment may not be worth the high interest cost.

Provide a large down payment

Offering a large down payment on a car can also lower your monthly payments since you’ll be financing a smaller amount. For instance, if you purchase a $25,000 vehicle and offer a down payment of $5,000, you’ll only need to finance $20,000. Assuming a four-year loan term and 7.00% interest rate, your loan payment will be $100 lower each month because of your down payment.

A large down payment can be especially helpful if you’re shopping for a bad credit car loan and need to boost your approval odds or want a lower interest rate.

Boost your credit score

If you can qualify for a lender’s lowest interest rate, you’ll pay less money overall for your car loan. However, to receive the best rate, you’ll need a strong credit score. The higher your credit score, the easier time you’ll have qualifying for a loan and the lower your rates may be. This, in turn, can land you lower monthly payments.

Working to improve your credit score can translate to big savings on auto financing. Start by making on-time payments and paying down your current debt.

Lease a car

Instead of purchasing a vehicle, leasing a car can come with lower monthly payments. Instead of owning your vehicle at the end of your financing agreement, you’ll either have to exchange it or return it to the dealership. While you won’t build any equity by leasing a car, it can make your monthly payments much more affordable.