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How to Lower Your Car Payment

Sure, the U.S. economy is booming but more than seven million Americans are behind on their car loans, according to Bloomberg. The number is the highest in the 20 years that the Federal Reserve Bank has tracked such rates, and it’s raising some red flags.

“Despite auto debt’s increasing quality, its performance has been slowly worsening,” said Joelle Scally, administrator of the Center for Microeconomic Data at the New York Fed, in a statement. “Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans.”

If you’re among those wondering how to lower your car payment — either an existing or future one —you’re not alone. A recent survey by Northwestern Mutual found that 25% of Americans feel anxious “all of the time” about their personal financial situation. If you’re concerned, then you can take steps to work your way out of a financial crunch and not face financial hardship or auto repossession by lowering your car payment.

How to lower your car payment

There are many reasons that car owners and buyers find themselves struggling to pay high car high car payments, whether it’s a sudden job loss, unexpected medical costs or just financial hardship. Cars are expensive and increasingly, dealers and banks are offering to finance a car for 60, 72 or even 84 months, reported Kelley Blue Book. Buyers often take such long-term loans to assume lower monthly payments but the total cost of the loan is much higher.

Even if you can pay your car loan, you may want to reduce your car payment to improve your credit score, lower your interest rate or just pay out less each month.

Where you begin in your journey to lower your car payment depends largely on your financial situation, and where you are in the buying or ownership process.

Consider these strategies to lower your car payment and save money.

Lower your car payment before you buy

  1. Decide on the total price you want to pay. Many people make auto financing errors because they shop monthly payments for a car rather than the total price and cost of the car. Instead, consider the “out-the-door” price of the car which includes all taxes, title and registration and any hidden fees in one total number.
  2. Make sure the price will work for your budget. Consider using the 20/4/10 rule when you buy a vehicle. That means you pay 20% of the down payment, don’t finance for more than four years and don’t spend more than 10% of your total gross income on the car payment, insurance and other auto-related expenses. Even if you opt not to follow that system, it’s a jumping off point.
  3. Narrow down your vehicle choices. You should assess what features you want in a car. Some might include high MPG, roomy interiors or the latest technology. Read all of the reviews and information you can find on cars that meet your needs and pay special attention to expert reviews. Consumer reviews tend to be one-sided, so take them with a grain of salt. Next, analyze the price of those cars in your area. Kelley Blue Book has a free online tool that offers a great place to compare cars and find prices.
  4. Choose a lender. There are an array of lenders that offer auto loans. Many people choose lenders based on the interest rates charged or advertised. That’s a solid idea but there are other pros and cons to banks, credit unions, online lenders and dealerships. Review this guide from LendingTree to see some of the rate differences. Choosing the right lender is key to lowering your car payments.
  5. Get preapproved. When you find a great loan rate you can lock it in with a preapproved loan rate. If you finance through a dealership you won’t know if the rate you’re offered is the best available. Car dealers not only raise price prices, they raise APRs, which means it’s important to look for a car loan outside of the dealership. By getting preapproved with your bank, credit union or online lender you are better equipped to find a great deal. Another benefit of preapproval is that some lenders give you a check or coupon for the amount which allows you to pay the dealer just as if you were paying cash.
  6. Consider your down payment. If you have solid credit and a healthy savings account, you can make a high down payment. That will lower your car payment. It will also decrease the overall price you pay for the car because you finance less of the amount. One caveat: Don’t make a large down payment if it might hamper your ability to pay other debts.
  7. Remain flexible. If you have your heart set on model A, but model B has a high rebate that you can parlay into better financing, seriously consider model B. Don’t become so emotionally attached to a car that you neglect to consider other deals that suit your needs and enhance your budget.

Lower your car payment when you already own a car

If you already own a vehicle and want to lower your car payment, follow the steps below.

  1. Refinance your car loan. Refinancing your auto loan basically pays off your current loan and rolls you into a new one at a potentially lower rate and, generally with a lower principal. The new loan may have lower interest, a longer term or both. Before you jump into refinancing though, make sure that your current loan doesn’t include a penalty clause for early repayment. If it does, check the amount and make sure refinancing makes financial sense. Check this free auto loan refinancing calculator to begin to assess your options.
  2. Consider a home equity line of credit (HELOC). Prior to the recession, HELOC’s were very popular. They offered borrowing and repayment flexibility to homeowners that had equity in their homes. There are, however, many risks involved in HELOC’s including home foreclosure, frozen credit and variable interest rates. Depending on your financial situation and other variables, it may be an option to pay off at least part of your auto loan, to make payments more manageable by using a HELOC. HELOC’s are an option but proceed with caution.
  3. Talk to your lender. The lender that holds the note on your car doesn’t want you to default or have you refinance elsewhere. As soon as you think your car payments are overwhelming or your interest rate is too high, talk to your lender about renegotiating the terms of your auto loan.
  4. Cancel some extras. Explore canceling satellite radio, roadside assistance and any extra warranty plans you may be paying for. Although some of those options might not directly reduce your car payment, they can boost your cash flow and you can put the money toward paying down your car note.
  5. Trade in or sell your car. You can always rely on public transportation or buy a less expensive car. If you can’t pay for your current car, consider trading in your car and opting for a less expensive option. Remember, though, you may need to pay off any remaining difference you have between the loan and what the car is worth.
  6. Secure a personal loan. Approach a lender for a personal loan to pay off a lump sum of your auto loan. If the interest rate on the personal loan is less than the interest rate for your auto loan you could save a significant amount. Most personal loans have fixed interest rates, and while personal loan rates tend to be higher than auto loans, the difference between paying off the personal loan and a higher interest car payment can save you thousands. Once you pay off the auto loan, you can use the money you’d normally put towards a vehicle, to pay off other, high-interest debt like credit cards or other loans.
  7. Add a cosigner to your loan. If you are concerned about missed payments and don’t have the means to secure a lower interest rate when refinancing, you may want to consider adding a cosigner to the loan. A cosigner with good credit may help you significantly reduce your payments.

Keep your car payment low at all times

The best way to keep your car payment low is to know and track your credit score. The better your credit score, the more likely you are to get a low interest loan whether you are just buying or you have to refinance. You should know your score before you speak to a lender so that you can double check the rate they use and make sure you obtain the best possible loan. Tracking your score over months allows you to challenge and resolve errors and discrepancies.

How to avoid car repossession

When you follow our advice for buying a car you have less chance of facing auto repossession or surrender. There are steps you can take to avoid losing a car you already own due to any financial downturns.

First, check your car’s value. There are cases when a car’s value has increased and it is worth more than the amount owed. You can find out the value on the Kelley Blue Book online tool we mentioned earlier.

If you’ve already called your lender and have not been able to work out a repayment agreement, check your rights. Repossession rules vary among states and most repossessors can take your car for non-payment, according to the Federal Trade Commission (FTC). Check state laws to determine if your car can be repossessed. You can start by checking this of state rules from the American Recovery Association.

Remember that it’s important to try to avoid recovery or surrender to protect your financial future. Even if the lender sells the car, you’ll likely need to pay the remainder of your loan, late payments and other fees. Any court fees or judgments can ding your credit for up to seven years.

If you have no options that allow you to keep the car, though, it’s better to voluntarily surrender it rather than having it repossessed. Pay off the defaulted amount as soon as you can, to work toward rebuilding your credit.

Financial hardships happen to many of us. It’s vital to carefully track your income, expenses and savings so you stay ahead of any missed payments that can result in repossession or surrender. Notifying your lender and working out a repayment plan is the best way to keep your credit score high and your financial future solid.


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