Auto Loans

How to Lower your Monthly Car Payments

Avoid drowning in car debt with these helpful money saving tips

There are things you should do and things you shouldn’t when it comes to lowering your monthly car loan payment.  In this section, we offer helpful money saving tips to make your car loan more affordable, the right way.

Reconsider longer term loans

Today, more and more car buyers are taking out longer loans — over six or seven years versus the normal three to five years — to reduce their monthly car payments. You might want to reconsider longer term loans since they can be riskier, including higher interest rates, more interest paid over the life of the loan, and less paid on the principal balance which could end up costing you more than the car is worth.

Get pre-approved

When it comes to buying a car, your best bet is to get pre-approved for a loan before you go shopping.  Not only can you lock in low rates before they have a chance to increase, you can use the offers you receive as a negotiation tool with the dealership, if its rates are higher.  What’s more, it’s good practice to focus on getting the best possible sales price for a car first, and then discussing financing with the dealer later.  Getting pre-qualified for a loan helps you do just that.

Consider a home equity loan

If you qualify, there are advantages to using a home equity loan or a home equity line of credit (HELOC) to purchase a car.  For starters, home equity loans usually come with lower interest rates than standard auto loans because they’re borrowed against the equity in your home as collateral which drives down the interest costs.  What’s more, you might actually be able to deduct the payments if you itemize them on your federal tax return.  Be sure to consult a tax advisor to determine if this is a smart approach for you.

A HELOC usually comes with the lowest rates but it’s a riskier proposition.  HELOC rates are variable which means you’re stuck with a higher monthly payment should interest rates increase.  While a HELOC makes sense for loan terms of 36 months or less, financing over 36 months is better suited for fixed rate home equity loans.

Check the numbers

Don’t sign on the auto loan line until you know its true, long term costs.  Be sure to check the annual percentage rate (APR) since this interest rate includes all lender fees and charges which is the true rate you’ll pay.  Then, ask the lender for the sum of all the monthly payments you’ll make during the life of the loan, plus all fees and charges.

Increase your down payment

If you can afford it, increase your down payment to lower your monthly car payment.  Smaller down payments actually increase the cost of longer term loans.  If you increased your down payment to 20 percent, for example, you could save a lot of money while potentially securing a shorter term loan in the process.

Review your loan docs carefully

Carefully review your loan by checking the fine print for all fees and conditions. Beware of large financing fees, required credit insurance or penalties for prepaying the principal during the life of the loan, which could prevent you from refinancing or increasing your monthly payments to boost your equity in the car.

Buy the car you can afford

If you’re considering taking out a longer term loan, you might be considering buying a car you can’t afford.  Put yourself in a solid financial position by buying a car you can pay off in five years or less.


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