Author: Sean P. Egen
April 29, 2021
A monthly car payment can take a bite out of your budget. Check out these tips on how to keep it on the low side.
For many of us, a car will be the second most expensive purchase (after a home) we ever make. And the majority of us will finance that automobile purchase with a loan, which means having a car payment. Depending on how much of the car’s purchase price you finance, the term length of the loan, and how long you keep the car, this could mean years of making a monthly car payment.
A car payment can take a significant bite out of your monthly budget. But there are ways to keep that payment down or, if you already have a car loan, to lower it.
If you’re shopping for a car and plan on financing some or all of your purchase, doing any of the following could help keep your car payment lower and more manageable:
If you already have an auto loan and are looking to reduce your monthly payment, consider these options:
While refinancing the remaining balance of a car loan may lower your monthly car payment, it won’t necessarily save you money. Let’s say that your current loan has 24 months remaining on a balance of $10,000 at an interest rate of 5%. If you refinance that $10,000 at an interest rate of 3% for the same 24-month term, your monthly car payment should go down and you should save money on the total amount paid for the car. However, if you refinance at the same 5% interest rate and simply extend the length of the loan from 24 to 36 months, your monthly payment should go down but the total amount you pay for the car should increase because you’re now making car payments for an additional 12 months. If you both reduce the interest rate and extend the length of the loan, your monthly payment should go down, but the total amount you pay for the car could go up, down, or stay the same. It all depends on whether the money you save by having a lower interest rate is greater, lower, or the same as how much additional interest you’ll pay because of the increased term length of the loan.
As mentioned, perhaps the number-one thing to consider in deciding to refinance an auto loan is how much you’ll save—or how much more you’ll pay—by doing so. A lower monthly payment may be desirable, but if it’s achieved by paying a higher total price for the car, is it actually worth it?
There may be fees associated with refinancing, such as the aforementioned prepayment penalty. If you refinance with another lender, they pay off your existing loan. If there’s a penalty for paying off that loan early, you will be the one responsible for paying that fee. There may also be other fees associated with refinancing, such as lender or title fees.
If you owe more money on your existing loan than the car is actually worth, you may have difficulty finding a lender willing to refinance your loan. This is called being “upside-down on your loan.” It’s not impossible to refinance an upside-down loan, but it will likely be more difficult to procure refinancing than if your car is worth more than what you owe on it.
Also, be aware that, when you apply for auto refinancing, your credit score could take a hit if and when the lender does a hard inquiry to your credit reports. Some lenders may offer an option to see if you pre-qualify for refinancing your loan, which could help cut down on the number of hard inquiries made to your credit reports.
If you’re concerned with a car payment eating up too much of your monthly budget—or you’re looking to reduce an existing car payment—there are preventative measures as well as steps you can take after signing up for a loan to make your payments more manageable. Just be sure to do your homework and crunch the numbers to ensure that any actions you take make solid fiscal sense.
About the author:Sean P. Egen
After realizing he couldn’t pay back his outrageous film school student loans with rejection notices from Hollywood studios, Sean focused his screenwriting skills on scripting corporate videos. Videos led to marketing communications, which led to articles and, before he knew it, Sean was making a living as a writer. He continues to do so today by leveraging his expertise in credit, financial planning, wealth-building, and living your best life for Credit One Bank.
Nothing smells quite like the inside of a brand-new car. But that new-car smell, as intoxicating as it may be, could cost you thousands of dollars more than a similarly featured ride with a slightly less aromatic interior. Given that a vehicle is the second-largest purchase (after a home) most of us will make in our lifetimes, it’s worth weighing the pros and cons of going new versus used on your next car or truck purchase. Doing so could help streamline the buying process and save you time, effort, and hopefully some cash. So consider the following before signing on the dotted line for your next vehicle.
While most rental car companies will let you settle your bill in cash when you return the car, some will not let you reserve a car with a cash deposit at the beginning of the rental transaction. Other rental car companies may let you rent a car with a cash deposit, but you will most likely have to clear multiple hurdles first—providing proof of insurance, showing a paycheck stub, filling out an application and possibly paying a fee, providing copies of utility bills, and more—plus, you may have to pay the entire cost of the rental up front.
When muscles are tight, you have to work on making them more flexible. When money is tight, flexibility once again plays a key role in helping you find ways to free up funds or earn more income. Especially given that habitual behavior and rigid thinking may have played a role in helping to create your current financial picture.