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.
Contact Your Lender
Contact your lender as soon as you know you won't be able to make payments. Many lenders are willing to work with borrowers to avoid vehicle repossession and get their payments under control. The sooner you get in touch, the more options your lender may be able to offer.
Almost any monthly payment amount can be reached by tweaking the contract, which could cost you more in the long run. Dealers may do the following to get you the monthly payment you desire: Extend the loan. A salesperson can get a lower monthly payment for you by simply extending the length of a loan.
Extra payments made on your car loan usually go toward the principal balance, but you'll want to make sure. Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want.
Paying off a car loan early can save you money on interest and improve your debt-to-income ratio. Early loan pay-off can also give you ownership of the vehicle sooner and reduce the risk of being upside-down on the loan. Before deciding to pay off your loan early, consider if your money could be better spent elsewhere.
Renegotiating your loan terms, refinancing or making extra payments can help lower your car payment. You can also sell your current car and buy one with a more budget-friendly payment but watch out for high interest rates. Before you buy, shop around and save for a large down payment to keep your car payment low.
NerdWallet recommends spending no more than 10% of your take-home pay on your monthly auto loan payment. So if your after-tax pay each month is $3,000, you could afford a $300 car payment. Check if you can really afford the payment by depositing that amount into a savings account for a few months.
Are Car Down Payments Illegal? While there are some myths circulating that claim otherwise, car down payments are perfectly legal.
Many lenders offer auto loan hardship programs to help borrowers manage their monthly payments while dealing with a financial emergency. Options include smaller monthly payments, a reduced interest rate, payment deferment and payment extension plans. Each lender has its own requirements.
If you need to skip a payment, a payment deferment on a car loan will help you avoid repossession. Sometimes, your auto loan will even have a built-in deferment policy. Regardless, you can't defer a car payment without the approval of your lender.
On average, a new car buyer with an excellent credit score can secure an average interest rate of 5.25%, but that average jumps to 15.77% for borrowers with poor credit scores. For used car buyers, those averages range from 7.13% to 21.55%, depending on the borrower's credit history.
Your car is worth more than what you owe: If your car has positive equity, you can use the difference as a down payment on your new vehicle, which could lower your monthly payments. For example, if you owe $10,000 on a car worth $15,000, you could apply the $5,000 credit toward purchasing your new car.
Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment. If that leaves you feeling you can afford only a beat-up jalopy, don't despair.
To calculate an affordable car payment, use the recommended 20% down and 60-month maximum loan term. Based on those terms, a person making $100,000 a year can afford a $61,000 car, assuming their other expenses allow for a monthly payment of approximately $931.05.
Refinancing your loan will lower your car payment depending on a few key factors, including your credit score, your current loan terms, and the current average loan rates. If your credit score has improved since you first financed your loan, you may have the opportunity to get a much better rate by refinancing.
Talk to your lender: If you're struggling to make your payments because of financial hardship, get in touch with your lender right away. They may be able to make your payments more manageable by reducing your interest rate, deferring payments, or extending your loan term.
Yes, refinancing your auto loan will usually hurt your credit a little. But if you make your new loan payments on time, any damage to your score will likely be both temporary and small. Your credit could bounce back to its current score in as little as a few months.
Ask Your Lender About Financial Support Options
As a result, lenders are typically willing provide some help if you're going through a financial downturn. That was particularly true during the COVID pandemic. So, ask your lender about hardship programs, which include loan deferrals and late-fee waivers.
In addition, when you pay off a car loan, your credit mix changes because you now have one less account in your name. This change can lead to a drop in your credit score.
Although it may not seem like much, paying twice a month rather than just once will get you to the finish line faster. It will also help save on auto loan interest. This is because interest will have less time to accrue before you make a payment — and because you will consistently lower your total loan balance.
Is car insurance cheaper if you own your car? Car insurance premiums don't automatically go down when you pay off your car, but you can probably lower your premium by dropping coverage that's no longer required. Banks and financing companies who loan you money for your car are called lienholders.