Auto loans are expensive, but you can lower your payment before and after financing your purchase.
Buying a car is different than buying a microwave, smartphone, or pair of sneakers. Taking out a car loan is an expensive, long-term investment that makes you responsible for making monthly payments year after year… after year after year.
Your financial situation can change while you’re paying down your auto loan, too. Maybe Younger You bit off more than you could chew and took out too large a loan for you to handle. Or maybe you lost a well-paying job and need to tighten the belt around your budget. Maybe you’re just adamant about keeping as much of your hard-earned money as you can (and who could blame you?).
The average monthly payment for a used car is $430. For a new car, you’re looking at an average monthly car payment of $575 (oof!). Even if you’re paying significantly less, you don’t need to justify your desire to lower your car payment.
Shopping around, saving for a down payment, and refinancing your existing loan are all great ways to lower your monthly payment. With a solid strategy, you can save money both before you head to the dealer and after you’ve taken out a new auto loan.
What Happens If My Monthly Car Payment Is Too High?
When you finance a car purchase through a bank, credit union, or dealership, you agree to pay the loan back in full. The lender expects full repayment of the current loan balance, including the principal and accrued interest.
Failing to make full or timely payments on your car loan may result in:
Keeping payments low (or actively working to lower them) may help you avoid the severe penalties from not paying your car loan on time.
How to Keep Your Car Payment Low Before Purchasing a Car
You don’t need to wait until you’ve bought your car to lower your monthly payment. If you go into the car-buying process with some prep and planning, you stand a good chance of keeping your car payment low.
Save for a down payment
When you make a down payment, you’re paying a portion of the car’s purchase price before financing the rest. In doing so, you reduce the overall amount you’re borrowing (your total loan balance).
Lenders prefer when borrowers make down payments as it gives you some skin in the game. As a result, your loan is more likely to be approved. If that’s not good enough, it may even have a lower interest rate.
But how’s that lower your monthly payment?
Because you’re reducing the principal amount you’re borrowing at a potentially lower interest rate, you’ll pay less money over time than if you didn’t make a down payment — or made a smaller down payment.
Shop around for auto loans with low interest rates
Rate shopping at different dealerships, banks, and credit unions is an effective way to ensure you’re getting the best bang for your buck.
Don’t worry about multiple credit inquiries, either. When you’re rate shopping, multiple credit inquiries for the same purpose made within a given timeframe only count as one inquiry, so you won’t tank your score.
By choosing a loan with the lowest interest rate, you’ll wind up with a lower monthly payment. Win/win!
Take out a longer-term car loan
In 2020, the average loan term for a vehicle purchase was 72 months for new and 65 months for used. (Not surprisingly, the average loan term for both new and used cars increased in 2020 compared to 2019, perhaps due to COVID.)
Longer loan terms aren’t necessarily great — you’ll pay more in overall interest compared to loans with shorter terms and you risk becoming upside down on your loan. However, because you’re spreading your loan out over a longer length of time, your monthly car payment is lower.
It’s a trade-off, sure, but there’s also nothing stopping you from refinancing to a loan with a shorter term in the future or making larger payments to pay off the auto loan faster.
How to Lower Your Car Payment After Purchasing a Car
Sometimes, borrowers aren’t in the financial position to lower their car payments before financing the purchase. Fortunately, you’re not without options even after you’ve taken out and begun paying your loan.
Refinance your car loan
Refinancing is one of the most effective ways to lower your car payment, helping you spend your money on things far more exciting than a bill (or at least your car payment).
When you refinance your auto loan, the interest rate, term, and monthly payment of the new loan are based on your current creditworthiness. If you’ve paid down some debt, boosted your credit rating, or discovered you initially took out a predatory car loan, refinancing can save you significant money every month. Even if you haven’t improved your credit much, interest rates have been dropping since early March 2020.
📉 Compare your auto loan interest rate to today’s auto refinance rates right here.
In July 2021, borrowers saved an average of $103.93 per month after refinancing their car loans. Even borrowers with bad credit celebrated significant savings of, on average, $114 per month after refinancing.
Negotiate with your lender
Though it may not always seem so, reputable financial institutions aren’t out to prey on unexpecting borrowers. Repossession, car auctions, debt collection, and other avenues to recoup a bank’s loss all cost time and money. It’s more cost- and time-effective for a lender to work with you and figure out a way for you to pay your loan in full.
Before you miss any payments, contact your lender to discuss your options. In some cases (as was common during the worst of COVID-19), your lender may offer to defer payments for a period of time. In other cases, you may get a lower monthly payment by extending your original loan term.
You may even be allowed to settle your debt, which means paying a portion of your remaining loan balance in exchange for ending your obligation. However, even though a settlement helps you pay off your loan, it leaves a negative impact on your credit report since you haven’t paid the loan in full.
Trade in your car
The value of a car depreciates over time, though it maintains a percentage of its value. If you’re in a pinch, trading in your car may be an easy solution to get out of paying your monthly payment.
You can use the money you earn from your car’s trade-in value to buy another vehicle in cash or as a down payment for one you can more easily afford. Better still, trade-ins don’t damage your credit.
They’re not without risk, though. Avoid trading in your vehicle if your loan is upside down, or underwater. An upside-down loan is one in which you have negative equity (you owe more on your loan than your car is worth) You don’t want to be without your vehicle and still owe the remaining balance on a loan for a car you’re no longer driving.
What If I Can’t Lower My Car Payment?
Life sometimes finds a way to be uncooperative even when we really, truly need it to. Unfortunately, that means that, depending on your circumstances, you may not be able to lower your auto payments.
Before you risk a missed or late payment, there are other means of continuing to pay your loan on time without ruining your credit.
Consolidate your debt
Debt consolidation is a means of wrapping multiple individual debts into a single loan with one monthly payment. If you’re struggling to make payments to multiple different bills each month, debt consolidation may help you pay off your debt quicker and with less hassle.
Having fewer bills to pay may make it easier for you to pay your auto loan on time and avoid costly and painful late fees or missed payments.
Consider a personal loan
Many financial institutions offer personal loan products for purposes of debt payoff, home improvement projects, and other reasons. Personal loans may be an attractive option if you’re unable to qualify for a loan refinance or manage to find a personal loan with better terms than a refinance.
However, personal loans aren’t often secured and may have higher interest rates than an auto loan (refinanced or not).
If a traditional personal loan is out of the question, reach out to trusted friends and family. See if someone’s willing to offer a truly personal loan to help you pay off your car loan — just make sure you pay them back.
Sell your car
Selling your car is like trading in your vehicle though, in this case, you’re not using the money for another vehicle. Instead, aim to sell your car for at least as much as you owe on the loan, then use those earnings to pay your loan off in full.
From there, you have a clean slate to, ideally, finance another vehicle purchase with better terms — or even buy one outright in cold, hard cash.
File for bankruptcy
Bankruptcy is a way to wipe out your debt obligations or restructure the way you pay them, but it comes with a hefty cost. A bankruptcy remains on your credit report for ten years, making it difficult to take out new loans or lines of credit.
As a last resort, bankruptcy may save you from being crushed by overwhelming debt when you’re completely out of options.
It’s Never Too Late to Try Lowering Your Car Payment
Other than your rent or mortgage (and maybe student loans…), your car payment is likely your most expensive bill. Depending on your loan term, you may be paying it off for years to come.
Before you buy a new or used vehicle, try to set yourself up for the lowest monthly payment possible by putting down a significant down payment, shopping around, and choosing the right loan term for you.
If you’ve already been forking over a hefty sum each month to a lender, look into refinancing your car loan. You may also want to give your current lender a call to discuss options available to you, including the possibility of extending your loan term.
Whatever your course of action, don’t remain idle: a lower car payment may equate to hundreds of dollars more in your pocket.
About The Author
Daniel Mattia is a freelance content writer and author. He's written extensively about insurance, personal finance, and small business. Daniel's past and current clients include The Zebra, Bestow, Ensurem, and others across a variety of industries.