How to lower my car payment
The average American spends about $800 a month on transportation, a fairly high amount that is second only to the cost of housing.
This section includes fuel and car repairs, however, most of the transportation expenses are related to the purchase of the vehicle.
If you need to restructure your budget and reduce your monthly expenses, you may be wondering: How to lower my car payment? Well, below you will find the answers you need.
Even if you’ve considered returning your financed car because you couldn’t afford the payment, lowering your monthly car payment is a very smart way to adjust your budget without having to get rid of your car.
In this article you will find some alternatives to achieve it.
How to lower my car payment by amortizing capital
Prepaying principal is a good option to lower your monthly car payments and save money on interest.
If you have money available to make a loan principal, dividing the smaller remaining principal by the number of months left on your loan will result in a lower monthly payment.
You can always use excess cash, such as bonuses, utilities or inheritance, to pay down your loan and reduce monthly payments in the future.
IMPORTANT: Before making the capital amortization, check if your loan includes any prepayment penalty that will be applied when paying off the loan early.
How to lower my car payment with lower rates
If the car was financed at the time of purchase, applying to refinance your car is one of the best ways to lower your monthly payment.
On average, you can lower your interest rate by 2.4%. The interest rate you’re paying, expressed as an annual percentage rate, or APR, is another way of describing what a loan costs you.
But if it’s a relatively simple procedure, why isn’t it done more often? The simple answer: Many people don’t know they can refinance a car .
Although 2.4% seems like a small number, it could add up to more than $2,200 in savings over the life of your new loan , no small amount.
The average car loan is about $32,000 and the average term is about 68 months (or more than 5 1/2 years).
Let’s say you refinance five months after you bought the vehicle, a 2.4% reduction in interest rate could lower your car payment by more than $30 per month.
Multiply $30 times 64 months and you’ll save a total of $2,304. You could use that $2,304 to pay off high-cost credit card debt or take a vacation.
How to reduce my monthly car payment by extending the term
In auto loan terms, a shorter term means less interest is paid over the life of the loan. However, by extending the loan term you can lower your monthly car payment each month, sometimes significantly.
The auto loan market is huge, with over a trillion dollars in outstanding loans. That means that many lenders and investors are involved in the area of car loans.
As a result, the variety of terms and conditions available may surprise you. Loan terms extend to 84 months and beyond.
For example, let’s say you have a principal loan balance of $25,000 and 50 months remaining on your loan, with an interest rate of 5%.
If you could refinance to a 60-month term at the same 5% interest rate, your monthly payment would drop from about $550 to $470. That means you would have $80 per month freed up in your budget.
It’s true that you’ll spend more money on interest over the life of your new 60-month period, but there are times when paying a lower monthly car payment can help.
How to lower my car payment when choosing a used vehicle
Many of us have heard that when we pull a great new car off the dealership, we lose 10-20% of its value . The car hasn’t changed much except that it is now a used car.
Although the rapid depreciation in value of new cars is annoying to owners, it’s good news for those looking to buy a used vehicle.
Cars today are more reliable and last longer than ever, which means that used vehicles are an excellent alternative for many people.
The average monthly payment for a used car is about $400, while the average monthly payment for a new car is about $536. A difference of about $136 can go a long way when your monthly budget is tight.
How to lower your monthly car payment by choosing a smaller one
Maybe you bought a vehicle that is too big. That 8 seater car is a headache to park. The leather seats of the minivan with luxury package do not impress your family or your friends.
Then you could sell it to buy a cheaper model. The rise of new online services that buy your used car, such as Carvana , makes this option even more interesting and convenient.
By entering basic information about your car on one of these sites, you can quickly get an offer. If you agree, these companies can pick up your car at home and give you a check right away.
You can use the money received to pay off your old car loan and purchase a smaller, less expensive vehicle.
How to lower my car payment: Final reflection
If you’re like most Americans, when you bought your car you were excited to breathe in its new smell.
You asked your friends for some opinions, spent a few hours of your time researching reliability, gas mileage, etc.
You checked with several dealers to see who had the color you liked best and who would give you the best price.
The problem is that, probably, you have not looked for a loan for your car. Over 70% of buyers get their car loans when they are “signing the paperwork” in the dealer’s back office.
Although it is a fairly comfortable solution, it is not the best decision. Why? Because it is likely that the dealer does not take your interests into account when processing the loan.
The problem is getting worse today. The profitability of dealers has changed dramatically in the last 10 years, these companies used to make their profits in the traditional way.
That is, they would buy a car from the Ford or Toyota factory and sell it at a higher price, but in the last 10 years, the Internet has created much more price competition between dealers.
Read also: How to register a car in Maryland?
The result is that we, as consumers, do much better because we get better prices but dealers earn less when they sell a car.
The counterpart? Now you pay higher fees to process your loan than to buy your new car. Like savvy entrepreneurs, dealers have offset declining car sales revenues with car loan fees.
Do you have any idea how much a dealer can earn for servicing the loan? No more and no less than $1,788 for 2018, according to Outside Financial’s Auto Loan Market Index.
That means there was a 70% increase from the $1,046 paid in 2010.
If you look at it from the bright side, it’s not too late. Certainly, you could have saved yourself $1,000 if you had shopped for a car loan before going to the dealership.
However, there is still time to take the necessary actions to improve your monthly payment, the average borrower saves more than 2% in interest and more than 50 dollars a month through refinancing.