Ways to Lower Your Car Loan Payments

Read Time: 6 minutes

Own a car you’re still financing? Chances are your monthly payments are higher than you’d prefer.

Consider that the average monthly bill for new vehicles reached an all-time peak of $725 in the first quarter of this year, marking an 11.5% jump from a year earlier, versus an 11.2% rise and 2.2% increase in the typical payment for a leased automobile and used car, respectively, over the same period, according to a recent study by Experian.

If you are struggling to pay off your car month-to-month, or simply seek to save some cash otherwise pocketed by your auto loan lender, the good news is that you can pursue options to decrease your monthly vehicle payments. Read on for insights and tips.

The benefits of lowering your car loan payments

Sudhir Khatwani, founder of The Money Mongers, says it’s smart to explore ways to reduce your car loan costs – especially when budget constraints are in place.

“Paying less for your car loan can provide additional monthly financial wiggle room, allowing for necessary expenditures or the ability to increase your savings to counter any unexpected expenses,” he says. “It can also safeguard against loan default, which can significantly impact your credit rating.”

Maybe you’re a single parent trying to juggle multiple jobs to sustain your family. Or perhaps you are a recent college graduate burdened with hefty student loans.

“Whatever your situation, a lower car loan payment can offer financial relief, enabling you to allocate more resources toward other needs or establish an emergency fund,” adds Khatwani.

Strategies for lowering your car loan payments

There are four primary ways to lighten your auto loan burden, each with its pros and cons. The first two are straightforward strategies designed to immediately lower your out-of-pocket burden; the latter two are indirect approaches worth considering.

Refinance your loan

Often, the most successful and quickest way to shrink your car loan payments is to refinance your loan. This involves taking out a new loan, with different terms, to pay off your existing auto loan.

Experts say this strategy makes sense if you can lower your fixed interest rate. You can keep the same term existing on your current loan, which equates to paying less every month.

Alternatively, you can refi to a new loan with a longer term, which will decrease your monthly payments but result in you paying more in total interest over the life of the loan. (As a third option, you can refi to a shorter term – which will save you a lot in total interest, but you’ll pay more in monthly payments than you are now.)

“Refinancing is most beneficial when interest rates have dropped or your credit score has improved,” says Joel Efosa, a financial management expert and investor. 

For example, say you currently owe $10,000 on a car loan, currently at a 7% fixed interest rate, for which you pay $300 a month. If you refi to a new $10,000 car loan at a 4% fixed rate over 60 months, you could pay $116 less per month and save over $100 in total interest paid.

If you are ready to refinance, it’s important to shop around among several lenders and compare rates, terms, and loan offers carefully.

Negotiate your loan terms

Another way to lighten your monthly loan load is to contact your lender and attempt to renegotiate the terms of your loan. For instance, you can request an extension of your term, going from 60 months to 72 months, if your lender agrees, which would mean paying less each month.

“It’s worth trying because the worst they can say is no. That being said, many lenders will likely say yes if you have a strong credit score,” explains Ben Michael, director of Auto with Michael & Associates.

“Extending your term is a great option if you don’t want to go through a formal refinancing process or if the value of your car won’t support it. Just remember that a longer term means more total borrowing costs – put another way, you will pay your lender more interest and money overall over your loan’s life.”

Case in point: Extending a $10,000 car loan at a 4% fixed interest rate, for which you pay $300 monthly, from three years to five years can reduce your monthly payments by about $144 but cost you an extra $465 in total interest.

Or, you could ask for a payment deferment for a short time (such as a month or two) if you are suffering from financial hardship. This can let you off the hook from making car payments for a brief period, but interest on the loan will continue to accrue during the deferment period.

Make extra/accelerated loan payments

A roundabout way to pay less for your car in the future is to “pay it forward” now via accelerated loan payments. Here, you pay a bit extra every month, or at intervals your lender will allow, with the additional money going toward the loan principal (caveat: some lenders will only allow you to apply the extra money toward the interest). 

“This can save you money in the long run by reducing the amount of interest you pay overall,” Efosa notes.

“But it requires having extra money on hand. Still, if you were able to make an extra payment of $100 per month on a five-year, $10,000 car loan with a 3% fixed interest rate, you would save approximately $80 in interest and pay off the loan roughly 10 months sooner. 

Trade or sell your car

If your monthly car payments are causing you and your checkbook to see red, maybe it’s time to bail. In other words, ponder selling or trading in your vehicle and use the proceeds to purchase a more affordable car.

You will likely net more cash by selling your ride to a private party than trading it into a dealership, FYI.

“This can be an especially worthy option if your vehicle is worth more than the remaining balance on your loan. But you may end up with a cheaper or older car or no vehicle at all, depending on what you can afford,” cautions Efosa.

Ways to lower your car loan payments before you buy

Want to ensure that you’ll pay less for a vehicle you have yet to purchase and finance? Try these tactics:

  • Improve your credit score prior to applying for a loan. This can yield better loan offers with lower interest rates and more preferred terms.
  • Do your borrower due diligence. Shop from several different lenders and compare multiple loan offers to find the best deal.
  • Increase your down payment. This means you’ll need to borrow less, which will lower your monthly payment and total interest paid.
  • Purchase a used or more affordable car. Consider the steep cost of depreciation that quickly occurs with new vehicles.
  • Explore leasing instead of purchasing. You may end up paying less per month with a lease unless you have a poor credit score, but you won’t get to keep the car once the lease expires.
  • Choose a longer loan term. If you extend your payment cycle, your monthly payments will be lower but you will fork over much more in interest over the life of the loan.

The bottom line

Often, the best and most popular way to lower your vehicle loan payments is to refinance your loan. But if this is not an option, especially if you’d pay a higher interest rate than you currently are, investigate other strategies, including renegotiating the terms of your loan, making accelerated loan payments, and/or trading in or selling your auto. 

For best results, weigh the advantages and disadvantages of each option carefully and consult with your lender or a trusted financial advisor.

Erik J. Martin

Erik J. Martin is a Chicago area-based freelance writer and public relations expert whose articles have been featured in AARP The Magazine, Reader’s Digest, The Costco Connection, Bankrate, Forbes Advisor, The Chicago Tribune, and other publications. He often writes on topics related to real estate, personal finance, technology, health care, insurance, and entertainment. He also publishes several blogs, including Martinspiration.com and Cineversegroup.com, and hosts the Cineversary podcast (Cineversary.com).