How to Lower Your Car Payment: 8 Proven Strategies

Financial experts typically recommend that—at most—10% of monthly take-home pay should go to car payments. With the average new car payment coming in at $744 a month according to the Cox Automotive/Moody's Analytics Vehicle Affordability Index, it pays to find ways to cut costs.

Your options for lowering car payments can depend on whether you already have a car loan or are planning to apply for one to complete a vehicle purchase.

8 Ways to lower your car payment

Getting a lower car payment can free up money in your budget, making other costs—such as car insurance or gas—easier to manage. Exploring all available options can help you decide the best way to lower your car payment. Here are eight options to consider:

1. Refinance your loan

Auto refinancing means replacing your existing loan with a new one. Depending on how the new loan is structured, you may be able to:

• Lower your monthly payments.
• Reduce your interest rate.
• Extend your loan’s term.

Whether refinancing is worth it can depend on how much of the loan you've paid down. An online auto refinance calculator may give you an idea of how much you'd pay with a new loan.

It's also wise to shop around and compare refinance loan options. With MyAutoLoan, you can compare rates for refinance loans and get up to four offers in minutes. There's no credit check involved in estimating your new rate and monthly payment. Be sure to look at how much total interest you will end up paying if you extend the term of your loan to lower the monthly payment.

2. Sell or trade

Selling your vehicle can eliminate the car payment if you're able to get enough money from the sale to pay the remaining loan balance. If you want to lower your car payment but still need a vehicle, you might consider a trade-in instead.

Here are some tips to keep in mind if you're thinking of selling or trading your car to get a lower car payment.

• Research your vehicle's resale value on a site like Kelley Blue Book. Look at both the trade-in value and the private sale value to see which one might yield the most money.
• Check your loan payoff amount with your lender. This is the amount you'd need to pay to satisfy the loan balance in full.
• Look at what other used cars similar to yours are selling for in your area. That can give you an idea of where you might need to set your price to ensure a sale.

What if you're upside down on the loan, meaning you owe more than the car is worth it? You could roll negative equity into a new car loan for a less expensive vehicle. While that might lower your car payment, it will leave you with more debt to repay.

3. Ask about hardship programs

If you're unable to keep up with car payments because of financial hardship, your lender might be willing to offer some temporary relief. For instance, you may be able to skip a payment so you have a little time to get caught up. The skipped payment would then be added to the end of your loan term.

4. Save for a larger down payment

If you're still shopping for a car loan, saving for a larger down payment could help you get a lower payment when you're ready to buy. For example, instead of putting 5% or 10% down, you might aim for 15% or 20%.

You can open a high-yield savings account and schedule regular deposits every payday to grow your down payment fund. An online savings account could help you earn a higher rate on your money.

Sofi, for instance, offers a high-yield savings account with a 4.60% APY. You can open a savings account with as little as $0 and there are $0 monthly fees.

5. Choose a longer loan term

Opting for a longer loan term is a simple way to lower your car payment. Let's say you want to take out a $20,000 loan and your lender offers a choice between a 48-month loan or a 60-month loan. To keep things simple we'll assume the rate for both loans is 5%.

Here is what your payments would look like:

• Loan A (48 months): $460.59/month
• Loan B (60 months): $377.42/month

A longer loan term means you pay less monthly, but you'll pay more in interest overall. In the previous example, loan B would cost you $537 more in interest. So you'd have to decide whether that trade-off is worth it.

6. Set a smaller car-buying budget

Adjusting your budget for a car could lower your payment if you take out a smaller loan. Instead of spending $20,000, for instance, you might set your budget at $12,000.

This solution may not be ideal if you had your eye on a specific type of vehicle. But it could help make car payments affordable while you work on saving up for your dream car later on.

7. Aim for the lowest rate

A lower interest rate on a car loan results in smaller payments. There are a couple of things you might do to get a better rate on your loan such as improving your credit score and shopping around for the right lender.

Raising your credit score could make it easier to qualify for a car loan at a low rate. Some of the best ways to improve your score include making on-time payments to debts and paying down outstanding balances.

Comparing lenders is also a wise move as each one has different terms and lending criteria. Look for lenders that offer rate quotes without impacting your credit score to get a feel for what rates you might qualify for.

8. Pay off your loan early

If you have the money, pay your loan off early to eliminate your car payment. For example, you might pull cash from savings to cover the balance or sell things you don't need to raise the money.

Time Stamp: Lowering your car payment creates financial opportunities

Lowering your car payment is an opportunity to work toward other financial goals. For example, you might take the money you're saving on car payments and invest it in an IRA or use it to save for another financial goal. Robinhood makes it easy to open an IRA and start building wealth. Even lowering your car payment by a few dollars a month can add up over time.

Frequently asked questions (FAQs)

Is a $600 car payment too much?

A common rule of thumb for car payments is that you should spend no more than 10% of your take-home pay per month. If your take-home pay is $6,000, then a $600 car payment might not be too much. On the other hand, if your take-home pay is $2,000, buying a car that requires a $600 payment is unwise.

What are my options if my car payment is too high?

If your car loan payments are too high, your options include refinancing the loan, selling your vehicle, or trading it in. If you're in the market to buy a car, you might be able to get a lower car payment with a larger down payment or choosing a longer loan term.

How can I shorten my car payment?

You might shorten your car payment by opting for a smaller loan amount or increasing the size of your down payment. You could shorten your loan term to reduce the number of payments you need to make or refinance into a new loan with smaller payments.