How to Lower Your Car Payment

Lowering your car payment can help you avoid defaulting on your loan and damaging your credit. If you want to lower your current car payment, you have several options available, some of which may be more helpful than others. 

1. Sell your car

Putting your car up for sale can help you earn a lump sum, which you can use to pay off the remaining car loan balance. In addition, you may have some left over to help fund a new mode of transportation. However, if you sell your car and owe more than you got for it, you must still pay the lender the remaining balance. If you sell your car to a dealership, they’ll ask you to write a check for the remaining amount due before accepting your car for sale. 

2. Trade in your car 

Trading in your car for a more affordable vehicle can also help you get out of your car loan and effectively lower your car payments. This statement holds true even if you finance your next car purchase. If you want to trade your car for another vehicle with lower monthly payments, starting negotiations on the new car first is best. This way, you can introduce your current vehicle as a trade after you’ve already negotiated down the price of your next car. 

3. Refinance your car loan with a new interest rate 

Circumstances change, and you may have a higher credit score than when you initially financed your car loan. In this case, you can refinance your car loan by applying for a new one with a lower interest rate. Your new loan will buy out the old one, so you must still submit to a credit check. Refinancing a car loan can also come with additional fees that could make it cost-prohibitive. 

4. Refinance with new car loan terms

Besides determining a new interest rate, you can also refinance with longer terms. This arrangement will force you to pay more interest for your purchase, but it will lower your monthly car payment. Again, refinancing requires a credit check and subsequent fees. Many people find refinancing best if they’ve increased their credit score or interest rates have fallen to favorable levels. 

5. Apply for an auto loan modification 

Lenders may also agree to an auto loan modification if you struggle to come up with your monthly payment. These types of loan modifications require an application, and you may be denied several times before receiving any modification to your car loan. The process is also time-consuming and requires submitting: 

• Pay stubs
• Proof of (un)employment
• Proof of injury 
• Bank statements
• List of current bills
• Additional income sources 
• Hardship letter explaining your circumstances

Some lenders may reject your loan modification request and instead award you with a deferment. However, you should always express your intent to repay the loan fully and have a repayment plan ready. It’s much easier to negotiate with your lender if you know what payments you can afford and when you can return to business as usual. 

Knowing how car loans work can help you achieve a lower car payment before you sign on the dotted line. Car payments are calculated based on the cost of the car (often called the “principal”), loan terms, interest rate, sales tax, and additional fees. Most car loans apply initial payments to the interest and subsequent payments to the principal, meaning you pay more on the interest upfront than you do at the back end. 

Incentives and promotions, including those reserved for lessees, can help you pay less to drive the car you want. Subscribing to a vehicle with FINN can also help you manage your monthly car costs. In addition, here are a few other ways to lower your car payment before you buy. 

Do your due diligence

It’s convenient to work only with the dealership to determine your car loan terms, but you’d be missing out on a potentially better deal with your bank or another lender. Before you hit the dealership lots, check out what other offers you qualify for. You may find your lower car payment going with the bank you’ve been with for years rather than the dealership.  

Search for a car within your means

Tempting as it may be to stretch your budget to fit the cost of a car you’re dying to drive, the cost of taxes, documentation fees, and other dealership fees can send your budget over the edge. Finding a car within your means can also help you avoid getting upside down on your car only a few months after signing the paperwork. 

Improve your credit score

A few points’ increase in your credit score can translate to hundreds if not thousands of dollars less in interest, depending on additional car loan terms. If you’re considering buying a car and want to guarantee a better interest rate, working on your credit score can pay dividends. Higher credit scores can lower your monthly payment and unlock additional benefits. 

Make a down payment

Car loan down payments require a bit of strategy to serve you best. Down payments can help lower your financed amount, which reduces your monthly payments and keeps your head above water on the loan. However, down payments experience a diminishing return. 

While the exact amount varies from one loan to the next, it’s not a simple equation of more money down equals a lower monthly payment. Putting too much down on a car can put you at a disadvantage financially, especially if something happens to your vehicle. 

Pay sales tax upfront

In contrast to a down payment, sales tax increases your financed amount, which increases the interest you pay on the loan. Taking care of this fee before you sign the paperwork and drive away can reduce your financed amount and help you avoid paying additional interest. It’s often better to pay your sales tax upfront versus making a sizable down payment.  

Choose longer terms

Longer loan terms are often one of the quickest ways to lower your monthly payment before you finalize your car purchase. It’s a method dealerships use to qualify individuals with suboptimal credit scores. As such, it’s not the most economical decision because you are paying more in interest over the life of the loan, which also puts you at a disadvantage for staying above water in value. 

Subscribing to a car with FINN can also help you lower your monthly payment. FINN offers flexible terms of six and 12 months to help you adjust your transportation as you go. If you want to splurge for half the year on a luxury sedan to enjoy the summer sun, you can easily use your FINN car subscription to change that to a winter-ready SUV come December. Check out FINN’s available car subscriptions to view the current inventory.  

If you want to pay off your car loan faster, it does take a different approach. Here are the basic steps involved in paying your car loan off faster: 

1. Split your monthly payment in half and apply the first payment to the principal. You may have to speak directly to your lender to make this arrangement. 
2. Make your second payment as normal. Paying in installments can reduce your principal, reducing the interest you owe over the life of the loan. 
3. Pay extra on your loan each month. While this requires extra cash on hand, paying even $20 to $50 over your monthly payment can help reduce your principal faster, reducing your interest payment.

Read the fine print before making arrangements to pay off your car loan in advance. Though most lenders will not charge a prepayment penalty, some still do. 

You can lower your car payment without refinancing by trading it in, selling it, or applying for a loan modification. Unsure if you can return a financed car without penalty? It depends on if you’ve already taken possession of the vehicle, but many dealerships do not accept returns. Even when lemon laws apply, dealerships reimburse customers for the cost of the vehicle. 

If you can’t make your car payment and want to know how to get out of a car loan, you may be able to sell or trade in your vehicle at a local dealership. You may also be able to transfer a car loan to a family member so they can help you make your payments. If you cannot make payments, voluntary repossession looks much better on your record than defaulting altogether. This option may also cost you less. 

If you can’t lower your car payment, you might decide to start letting it earn its keep. Several side gigs allow you to make money with your car, from delivering food and packages to driving people to destinations and renting your car out for the day. If possible, speak to your lender to avoid defaulting on your loan and damaging your credit.