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7 Tips for Lowering a Car Payment

6 Tips for Lowering a Car Payment
Lauren Ward
Lauren WardUpdated September 13, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Vehicle prices are on an upward trend. Lenders financed an average of $40,290 on new vehicles and $28,534 on used vehicles bought in the second quarter of 2022, according to Experian. The average transaction price for new vehicles surpassed $48,000 in June 2022, while the average used car listing price surpassed $33,000, other data show. These numbers suggest the average U.S. car buyer puts more than 10% down when buying new or used vehicles. For many people, a car payment represents a huge chunk of the monthly budget. It’s important to be strategic about this type of debt, whether you already have an auto loan or plan to take one out in the future. The information below can help you learn how to lower your car payment in order to help you reach your financial goals:

1. Put Down a Large Down Payment

A larger car down payment lowers the overall size of your auto loan. That helps you save money in several ways. The first is that you’ll have a lower car payment because your principal balance is smaller. You also won’t pay as much interest over the life of the loan, which saves you money over time. Paying the principal on a car loan ultimately saves you money in the long run" Additionally, borrowers typically receive a better interest rate with a larger down payment. Here’s an example: A car buyer making a 12% down payment on a $41,000 new vehicle would amount to $4,920, bringing the actual loan amount to $36,080. On a five-year loan with a 4% interest rate, that down payment would lower monthly payments from about $755 to $664. And a larger down payment could help you qualify for a lower rate, amounting to even more savings over the life of your loan. Making a large down payment on a car is a tried-and-true tip on how to lower car payment expenses. A down payment may not be necessary to get a car loan, but borrowers are generally expected to provide proof of identity and proof of income when applying for auto loan financing, among other auto loan requirements.

2. Refinance for a Lower Interest Rate

Refinancing your auto loan could help you qualify for a lower interest rate. That could reduce your monthly payment if you keep the same loan term. There are a few different ways you can get a cheaper car payment by refinancing. For example, if your credit score has improved over the months or years since you initially took out the loan, you could potentially now qualify for better loan terms with an auto refi loan. Also, if you follow the general trajectory of rates, you’ll see that it fluctuates all the time. Rates may simply be generally lower now than when you bought your car, in which case you could save even if your credit score hasn’t changed. One thing to note is that your monthly car payment could still increase even with a lower interest rate if you opt for a shorter loan term. This strategy can help you pay your car off faster and for less money over the life of the loan, but it does increase your required monthly payment as well. This tip doesn’t highlight how to get a low car payment, but it does reflect how refinancing may minimize your interest costs in some cases. A car refinance calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs.

3. Refinance for a Longer Term

Wondering how to lower your car payment even if you don’t think you can get a different interest rate? You can also refinance your auto loan to stretch out your balance over a longer period of time. That means your remaining balance is split into more payments. The good news is that you’ll pay less each month. The bad news is that you’ll pay more in interest over time, since you’re making those payments for longer. Here’s an example of how a longer-term auto loan could impact a borrower’s finances in the near term and long term: Let’s say a borrower has a $20,000 loan for 48 months with an interest rate of 4.09%. The monthly payment would be approximately $452, and the total interest paid over the life of the loan would be roughly $1,715. Compare that to refinancing for a longer term. Maybe the borrower’s financial situation has changed since taking out the loan, and they want to cut their monthly budget as much as possible. Extending the $20,000 balance to 60 months (adding an extra year) would drop the monthly payments to about $369, but total interest would reach approximately $2,149. In other words, it may not be the best financial decision for long-term savings, but refinancing to a longer term can help someone navigate their immediate financial challenges. This shows that refinancing can be a tool for how to lower your car payment in some cases. Refinancing with bad credit might be an option for subprime borrowers, but subprime borrowers may not qualify for the best rates of interest.

4. Buy or Trade In for a Less Expensive Car.

Another strategy on how to get a cheaper car payment is to swap out your current car for a less expensive model rather than a high-maintenance luxury car. (If you own the more expensive vehicle, you can benefit even more by trading it in as part of your down payment.)  The average new car costs $48,182 as of July 2022, according to Kelley Blue Book data, but that doesn’t mean you have to spend that much. By comparison, the average used car listing price stood at $33,341 as of June 2022, according to CoPilot’s Return to Normal Index. Here’s the difference in how those two prices look in terms of monthly payments, assuming both have a 60-month term and 4% interest rate: A $48,182 auto loan would result in a monthly payment of about $887, and interest payments would total about $5,059 over the life of the loan. A $33,341 auto loan with the same terms would have a monthly payment of about $614 and cost about $3,500 in total interest over the life of the loan. Trading in your used car can reduce the amount of money you need to borrow when shopping for a new or used vehicle. This is one of the tips on how to lower a car payment without refinancing an existing loan. Recommended: How to Trade in a Car in 5 Easy Steps

5. Talk to Your Lender

In some cases, it’s possible to change the terms of your loan by talking to your lender directly rather than refinancing, particularly if you’re experiencing some type of financial hardship. You could potentially defer payments if you’ve had a temporary setback, or you could negotiate a longer term. The advantage is that you’ll avoid hurting your credit score and accumulating late fees. The disadvantage is that your auto loan interest will continue to accrue as you push back or extend payments. The way how car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges from an annual percentage rate or APR. Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply.

6. Lease a Car

Getting a short-term car lease is another possible way to get a cheaper car payment. Rather than taking out a loan to eventually own a car, you simply rent it for a set period of time. Once the lease is over, you can either return the vehicle or buy the car if your agreement allows for it. Lease payments typically cost less than auto loan payments. But instead of the money going toward your equity in the car, that money pays for the depreciation of the vehicle while it’s in your care. There is typically a warranty so that you’re not responsible for most mechanical issues that may pop up. And since most leases only last between two and four years, you may not have to worry about frequent breakdowns like you might with an older car. There are a couple of downsides that offset the potential month-to-month savings. First, by continually leasing a car, you’ll always be making payments and won’t have any trade-in value when your lease ends and you need to buy or lease another car. Also, there is usually an annual mileage restriction when you lease instead of buy. You have to pay a fee if you go over the mileage limit or inflict any excessive wear on the vehicle. But leasing offers a possible path on how to lower car payment expenses, particularly how to lower your car payment without refinancing an existing loan.  If you’re driving a leased car, a lease buyout loan is among the types of car loans you may consider if you’re interested in becoming a car owner.

7. Reducing Your Payment Before Purchase

Below, we highlight several ways you may reduce your borrowing costs when shopping around for a new or used car:

Buy a Less Expensive Car

Buying a less expensive car can reduce the amount of financing you need to borrow, which can minimize your monthly payment. For example, a new Ford F-150 pickup truck in the second quarter of 2022 carried an average monthly loan payment of $832 while a less expensive Honda Civic compact car carried an average monthly loan payment of $476, according to Experian. This illustrates how buying a less expensive car can lead to a more affordable loan payment than buying a more expensive car. This tip provides a possible path on how to get a low car payment when shopping around for a new or used car.

Up-Front Sales Tax

Car buyers in most states generally have to pay sales tax on the vehicle purchase, which affects the amount of money you may need to borrow to finance the purchase. Alaska, Delaware, Montana, New Hampshire, and Oregon don’t charge any car tax at all, according to Policygenius Inc.  Some states may provide a sales and use tax exemption on the purchase of a vehicle for certain buyers. Virginia, for example, exempts certain disabled veterans from its sales and use tax on cars. If you’re exempt or excluded from paying a car sales tax, that may allow you to secure a more affordable car loan.

Paying Off Other Debt First

Lenders may consider your credit score and debt-to-income ratio when deciding whether to approve or deny your application for auto loan financing. Paying off other debt first may improve your odds of approval and may help you secure better financing terms.

Shop Around and Compare Terms

Shopping around and comparing terms can help you choose an auto financing package that’s right for you. Some lenders may charge higher APRs than other lenders. Some lenders may offer 144-month auto loans to help consumers buy exotic cars.

Using Your Car to Earn Money

Below, we highlight several ways you may use your car to earn money:

Rent Your Car Out

If you own a car and don’t wish to drive it, you can earn money by renting out the car to prospective customers. Peer-to-peer car-sharing apps may help you rent out your car as a side business.

Delivery Driving

If you own a car and have spare time on your hands, you might be able to earn wages as a delivery driver. Taking up such gigs could involve delivering food orders to people’s homes and workplaces.

Ride-Sharing

If you own a car and wish to explore a possible side gig, you can explore opportunities to work as a rideshare driver. You can pick people up on demand and take them to their destination for a fee.

Is Lowering Your Car Payment Always Ideal?

Lowering your car payment is not always ideal if you can afford higher car payments in a shorter term. Lowering your car payment by refinancing for a longer term may cause you to pay more interest charges over the life of your auto refi loan. Securing a lower car payment by making a large down payment on the vehicle may be ideal if you can afford the up-front transaction. A large down payment can minimize your borrowing costs and may also help prevent your auto financing from becoming an upside down auto loan.

The Takeaway

Lowering your monthly car payment is not necessarily impossible. In fact, there are many ways you may be able to do it, depending on what you need and what makes sense in your situation. For some people, refinancing for a lower interest rate may do the trick, while for others, opting to switch to a lease might be a good option. There are several ways refinancing might be able to help. Lantern by SoFi can help you compare auto refinance rates from a variety of lenders just by filling out one easy online form. The benefit is that you can compare rates, terms, and fees before choosing a refinance loan.

Frequently Asked Questions

Is it possible to lower a car payment without refinancing?
Does paying extra reduce a car payment?
Can you get out of high car payments?
Does paying down principal reduce car payments?
Photo credit: iStock/deepblue4you
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About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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