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Vehicle prices are on an upward trend. In July 2021, the average new vehicle cost was more than $41,000, according to J.D. Power. And the average auto loan balance reached $19,865 in 2020 — a $634 increase from the previous year.
For many people, a car payment represents a huge chunk of the monthly budget. It’s important to be strategic about this type of debt, whether you already have an auto loan or plan to take one out in the future.
Learn how to lower your car payment in order to help you reach your financial goals. Some of these tips help you save on interest, some help you lower your monthly payment, and some do both. Find one or more that could be useful in your situation.
1. Put Down a Large Down Payment
A larger car down payment lowers the overall size of your auto loan. That helps you save money in several ways. The first is that you’ll have a lower car payment because your principal balance is smaller. You also won’t pay as much interest over the life of the loan, which saves you money over time.
Additionally, borrowers typically receive a better interest rate with a larger down payment.
Here’s an example. The average down payment on a car was 12% in 2019. On an average-priced new vehicle of $41,000, that would amount to $4,920, bringing the actual loan amount to $36,080.
On a five-year loan with a 4% interest rate, that down payment would lower monthly payments from $755 to $664. That’s an annual savings of nearly $1,100.
And a larger down payment could help you qualify for a lower rate, amounting to even more savings.
2. Refinance for a Lower Interest Rate
Refinancing your auto loan could help you qualify for a lower interest rate. That could reduce your monthly payment if you keep the same loan term.
There are a few different ways you can get a cheaper car payment by refinancing. If your credit score has improved over the months or years since you initially took out the loan, you could potentially qualify for better loan terms now.
Also, if you follow the general trajectory of rates, you’ll see that it fluctuates all the time. Rates may simply be generally lower now than when you bought your car, in which case you could save even if your credit score hasn’t changed.
One thing to note is that your monthly car payment could still increase even with a lower interest rate if you opt for a shorter loan term. This strategy gets your car paid off faster and for less money over the life of the loan, but it does still increase your monthly payment.
3. Refinance for a Longer Term
Wondering how to lower your car payment even if you don’t think you can get a different interest rate? You can also refinance your auto loan to stretch out your balance over a longer period of time. That means your remaining balance is split into more payments. The good news is that you’ll pay less each month. The bad news is that you’ll pay more in interest over time, since you’re making those payments for longer.
Here’s a hypothetical example of how a longer-term auto loan could impact a borrower’s finances in the near-term and long-term.
Let’s say a borrower has a $20,000 loan for 48 months with an interest rate of 4.09%. The monthly payment would be approximately $452, and the total interest paid over the life of the loan would be roughly $1,715.
Compare that to refinancing for a longer term. Maybe the borrower’s financial situation has changed since taking out the loan, and they want to cut their monthly budget as much as possible. Extending the $20,000 balance to 60 months (adding an extra year) would drop the monthly payments to about $369, but total interest would reach approximately $2,149.
In other words, it may not be the best financial decision for long-term savings, but refinancing to a longer term can help someone navigate their immediate financial challenges.
4. Buy or Trade In for a Less Expensive Car
Another strategy for lower auto loan payments is to swap out your current car for a less expensive model. (If you own the more expensive vehicle, you can benefit even more by trading it in as part of your down payment.) The average new car costs $41,000 but that doesn’t mean you have to spend that much. By comparison, the average price for a used car was $25,101 in July 2021.
Here’s the difference in how those two prices look in terms of monthly payments, assuming both have a 60-month term and 4% interest rate:
A $41,000 auto loan would result in a $755 monthly payment. Interest payments would total $4,305.
A $25,000 auto loan with the same terms would have just a $460 monthly payment and cost just $2,625 in total interest.
5. Talk to Your Lender
In some cases, it’s possible to change the terms of your loan by talking to your lender directly rather than refinancing, particularly if you’re experiencing some type of financial hardship. You could potentially defer payments if you’ve had a temporary setback, or you could negotiate a longer term.
The advantage is that you’ll avoid hurting your credit score and accumulating late fees. The disadvantage is that your auto loan interest will continue to accrue as you push back or extend payments.
6. Lease a Car
Leasing a car is another way to potentially lower your car payments. Rather than taking out a loan to eventually own a car, you simply rent it for a set period of time. Once the lease is over, you can either return the vehicle or buy the car if your agreement allows for it.
Lease payments typically cost less than auto loan payments. But instead of the money going toward your equity in the car, that money pays for the depreciation of the vehicle while it’s in your care. There is typically a warranty so that you’re not responsible for most mechanical issues that may pop up. And since most leases only last between two and four years, you may not have to worry about frequent breakdowns like you might with an older car.
There are a couple of downsides that offset the potential month-to-month savings.
First, by continually leasing a car, you’ll always be making payments and won’t have any trade-in value when your lease ends and you need to buy or lease another car.
Also, there is usually an annual mileage restriction when you lease instead of buy. You have to pay a fee if you go over the mileage limit or inflict any excessive wear on the vehicle.
Refinancing Your Auto Loan With Lantern
Refinancing your current auto loan doesn’t have to be difficult. Lantern Credit lets you compare offers from a variety of lenders just by filling out one easy online form. The benefit is that you can compare rates, terms, and fees before choosing a refinance loan. And you don’t have to worry about hurting your credit score with multiple inquiries.
Lowering your monthly car payment is not necessarily impossible. In fact, there are many ways you may be able to do it depending on what you need and what makes sense in your situation. For some people, refinancing for a lower interest rate may do the trick, while for others, opting to switch to a lease might be a good option.
There are several ways refinancing might be able to help. Want to see if you could lower your monthly car payment by refinancing? Start by comparing lenders with Lantern by SoFi.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0921177
This article is originally on Lantern by Sofi.