Read about some strategies that could make car payments more affordable. From refinancing your auto loan to negotiating the price of the vehicle, explore steps you may be able to take to obtain a lower car payment and take some pressure off your monthly budget.
Refinance Your Auto Loan
Auto loan refinancing can offer financial advantages that may come with a lower interest rate or longer term. When refinancing your car, the current auto loan is replaced by a new one, and you get a new loan and a new payment structure. Some auto lenders will refinance existing loans, so refinancing with your current financial institution prevents you from having to switch lenders.
One important thing to consider before refinancing: It's crucial to check with your current lender to determine whether prepayment penalties apply when paying off the loan during refinancing. These penalties can increase the total cost of refinancing your car loan.
To determine if it makes sense to refinance, do your research and shop among several lenders to understand the interest rate ranges offered for a refinance loan and how those rates compare to your current loan rate.
Remember applying for a car loan requires authorization for a hard pull of your credit. These inquiries can reduce credit scores. Fortunately, you can apply for multiple car loans within a certain number of days without severely impacting credit scores. For FICO® scores, you have 45 days to do this[1], and for Vantage scores, you have 14 days[2]. During these time frames, all the credit checks from car loan applications count as one check on your credit report.
You can access the information in your credit files with each of the three major credit bureaus — TransUnion, Equifax, and Experian — by visiting annualcreditreport.com[3]. If you find mistakes on your report(s), you can request the credit bureau(s) and/or the furnisher to investigate and make any applicable corrections. Rectifying errors on your report could help increase your credit score, but the process takes time. Generally, credit bureaus have 30 days (and up to 45 days in some circumstances) to complete their investigation if you alert them to potential credit reporting errors by filing a dispute[4].
Refinancing your current car loan may help lower monthly car payments, and understanding how the process works can help you make an informed decision. If pursuing this option, consider several factors that can contribute to how refinancing may lead to reduced car payments:
Lower Interest Rates Can Help Reduce Car Payments
One way refinancing can lower monthly payments is by securing a lower interest rate than you currently have. A lower rate is more likely if your credit score has improved since you first took out a car loan or if overall interest rates in the market have decreased. Depending on the loan amount and repayment term of the new loan, a lower interest rate may result in a lower monthly payment.
Remove or Add A Co-Borrower To Refinance
If your original loan had a co-borrower and you can now qualify for a loan on your own with better rates, refinancing can help you lower your monthly payments. If you have credit challenges, applying with a co-borrower with a good credit score could help you secure a better interest rate and potentially a lower payment. As stated prior, the amount you are required to pay each month and whether you are able to obtain a lower payment compared to your current payment is impacted by the loan amount and repayment term as well as the rate.
Make An Additional Down Payment
If you have the means, adding a lump sum payment at the time of refinancing can reduce the principal amount of the loan, lowering both the monthly cost and the amount of interest you'll pay over time.
Before refinancing a loan, it's crucial to understand the terms and conditions of the loan agreement, including any fees or penalties. Calculate the total cost of the new loan to ensure it meets your financial goals.
Consider A Longer Repayment Term
Choosing a longer-term auto loan can help make monthly payments manageable. Modern vehicles are built to last longer, so the car may retain its value better, reducing the chances that you'll eventually owe more to the lender than it is worth. However, longer-term loans come with distinct pros and cons.
Pros Of A Longer-Term Car Loan
A benefit of a longer-term car loan is that of lowering your monthly payments versus a loan with a shorter repayment term. Spreading the cost of the car over a greater number of months allows for a more budget-friendly monthly payment. Whether you're looking to invest, cover education costs, or address home repairs, lower payments can offer greater flexibility to your overall budget.
While loans will have a specific repayment timeline, you can choose to pay off the loan early. If your financial situation improves, you can make additional payments to reduce the total interest paid over the life of the loan.
Cons Of A Longer-Term Car Loan
Although a longer-term loan may result in a lower payment, it may also result in paying more interest over the life of the loan. Take into consideration the total costs of the loan at different repayment terms, and the ability to pay off a loan sooner, when thinking about choosing a longer repayment term.
When choosing a longer-term car loan, you risk the vehicle depreciating to a point where its value is less than the remaining loan balance, also known as being "upside down" on the loan.
Depending on your vehicle's age and type, qualifying for a longer-term car loan can prove more challenging. Why? Lenders might hesitate to offer extended payment terms for older used cars. Plus, the manufacturer's warranty may expire before you've paid off the loan, leaving you vulnerable to repair costs in addition to monthly payments.
Choosing the right car loan repayment term requires careful planning. Consider your financial situation and consult with a financial advisor before committing to any loan, particularly a longer-term loan.
Trade or Sell Your Car
Trading in or selling your car can provide access to payments that work well with your budget. It is crucial to understand your car's value before attempting to sell or trade it. If you owe more than your car is worth, you could end up rolling over the negative equity into a new loan, contradicting the goal of lowering your car payments.
Swapping out your old car for a new one through a trade-in can, in many instances, be hassle-free. Many car dealerships aim to simplify this experience, allowing you to arrive in your old vehicle and leave in a new one.
Additionally, opting for a trade-in is typically quicker than selling your car privately. This route spares you the time and effort needed to meet and negotiate with potential buyers, streamlining the entire process.
Selling your car on your own instead of trading it in at a dealership has advantages, too. One reason to sell your car through a private transaction is the potential for a higher selling price. Dealerships need to profit from the trade-in and subsequent sale, so their offer is typically below the car's market value. When you sell the vehicle privately, you can directly negotiate with the buyer.
If your car is in excellent condition, has low mileage, or includes added features or modifications, you can highlight these selling points to prospective buyers. Dealers may not recognize these details as much when assessing trade-in value.
While selling your car privately can seem appealing, it's essential to remember that the process involves time, effort, and potentially dealing with buyer negotiations and paperwork. Weigh these considerations carefully to determine which option may work best.
Negotiate A Lower Car Payment Before Buying
Negotiating the price of the vehicle when making a purchase can help facilitate lower monthly payments.
Do Your Research
Research the market value of the car model you're interested in using an online tool such as Edmunds or Kelly Blue Book, compare prices from different dealers, and understand the average interest rates for auto loans for people with your financial profile. Knowing the fair market value and interest rates you may qualify for can help you negotiate the best possible financing package to minimize monthly car payments.
Leverage Your Down Payment
Use your down payment as a negotiation tool; the more you can pay upfront, the more leverage you have to negotiate a lower monthly payment. A sizeable down payment can help secure favorable loan terms and minimize monthly payments.
Emphasize The Total Purchase Price
Salespeople may focus on the monthly payment, but this tactic can mask the total cost of the car and the loan. Negotiate the vehicle's full price first, independent of the monthly payment. Discuss loan terms (if you choose to finance at the dealership) and monthly payments once you have a favorable price. This approach helps ensure that you're not spreading out inflated costs over a more extended period, which could cost more in the long run.
Choose A Lower-Cost Vehicle
Shopping for a well-equipped and newer vehicle is fun, but it's wise to borrow less if you want a smaller monthly car payment. Choosing a used car in good condition that's been properly maintained is a way to keep the monthly car payments lower for your next vehicle.
Every dollar saved in negotiation helps reduce your monthly car payment, so spend time researching car values and stand firm as you create financial boundaries.
Free Up Cash In Your Budget By Securing A Lower Car Payment
Understanding how to pay less each month for your car can help free up money for other things you need or want. A lower car payment can create room in your budget to pay down other debts and further improve credit scores. But remember, smaller monthly payments may result in paying more interest in the long run. Understand the total cost of the loan and available loan options. Evaluate multiple lenders to find the best loan, and monthly payment, to meet your financial goals.
Learn more about vehicle finance options and calculate your monthly payments here.
