How to lower your car payment – Forbes Advisor
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Financing a car can be a big financial commitment, averaging hundreds of dollars a month. And with vehicle prices soaring after the Covid-19 pandemic, owning a new car can be expensive.
But there are ways to lower your monthly car payments that can provide more immediate relief to your financial budget.
5 ways to lower your car payment
If you’re struggling to keep up with your payments or want more room in your budget, you have a few options for lowering your car payment.
1. Provide a larger down payment
One way to make sure you don’t end up with a big monthly payment when financing a car is to pay more money up front. A larger down payment means you don’t have to borrow as much, allowing for lower monthly payments over the life of the loan. Also, the less you borrow, the less interest you will pay.
Here’s an example: Let’s say the car you’re interested in costs $35,000 and you’re putting 10% down, or $3,500. If you got a five-year car loan with an APR of 3%, your monthly payments would be $566.01 and you’d pay a total of $2,460.83 in interest. Now, if you put down 20%, or $7,000, on that same car and loan, your payment would drop to $503.12 per month and you’d save $273.43 in interest over the life of the loan. .
Related: Auto Loan Payment Calculator
2. Lump sum loan payments
At first it may seem like the opposite of your goal to lower car payments, but each time you are able to pay more of your auto loan, above the minimum required monthly payment, it will lower your payments. monthly at the end. For example, if you have extra savings or received a refund on your annual tax return, allocating them to an additional payment on your car loan will reduce the overall balance and amount of interest charged, as it is based on the balance of the loan. It can also help you repay the loan faster.
3. Refinance your loan
Refinancing your car loan involves taking out a new loan with different terms and using the funds to pay off your existing loan. Usually, borrowers refinance to get a lower interest rate, which means you’ll have lower monthly payments.
If interest rates have dropped since you took out your car loan or your credit score has improved, chances are you can refinance at a better rate. This can not only result in a lower monthly payment, but also save you money in interest charges over the life of your loan.
Lowering your rate, even by a few percentage points, can help. For example, suppose your current car loan has a balance of $20,000 and an interest rate of 6%, with three years to pay it off. If you refinance at 4% and keep the rest the same terms, you could reduce your payment from $608.44 to $590.48 and reduce the total interest by $646.52.
Another option is to refinance to a longer payment term. By extending your repayment period, you can reduce your monthly payment. But keep in mind that by taking longer to pay off your loan, you end up paying more interest over time.
4. Talk to your lender
If you are having difficulty repaying your car loan, it is important to contact your lender immediately. They may be able to come up with a short-term plan to help you get back on track.
For example, if you experience a temporary setback, your lender may allow you to defer a payment or two. This means that you don’t have to pay the current month and it is added at the end of your loan. Keep in mind that interest will accrue on that higher balance, but deferring could give you the breathing room you need to catch up.
After all, your lender would rather see the loan paid off than leave you in default, in which case they could repossess the vehicle.
5. Trade in your car for a less expensive vehicle
Finally, if you can’t afford your current payments, it may be a good idea to downsize.
One option is to trade in your vehicle at the dealership, subtract the balance from the gain, and purchase a less expensive vehicle. Trading in a car is a convenient option since you don’t have to worry about listing it privately and negotiating with potential buyers. However, you might not get the best value for money. Instead, you can expect to get the wholesale value.
Alternatively, you can sell it privately, which will likely fetch you a higher price. But you’ll also need to set up your own advertising and be prepared to haggle with potential buyers. If you still need to pay off your existing car loan, you’ll need to make sure the loan is paid off during the process.
How to reduce payments when buying the car
If you’re still looking for a new car, the choices you make now can affect the affordability or cost of your car loan for years to come.
Be sure to shop around and get quotes from multiple lenders. Although your credit score and other personal financial details play a key role in the interest rate and loan terms, some lenders will be able to offer better deals than others.
Keep in mind that you can often get an initial quote online without the lender doing a thorough credit check which can impact your credit score. However, this is only an estimate of what you might qualify for based on these initial details.
You can’t block an offer until you’ve officially applied for a loan, which involves a rigorous credit check that has a temporary negative impact on your credit score. But if you are applying to multiple lenders, try to do so in a short time frame.
Modern FICO scoring models recognize that multiple mortgage or auto loan applications in a short period means you’re shopping for rates, so it won’t hurt your score as long as you keep it within a 45-day window. VantageScore and some older FICO models require you to rate the store within two weeks.
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