How to Reduce Your Auto Loan Payment
Reducing your monthly auto loan payments can help you pay down other, higher interest debt or focus on other utility bills when times get tough. However, it is important to know that many options that can help lower your auto loan payment do require some money up front in order to work. Some other options will require you to lengthen the term of your loan by refinancing. Be sure to consider your long-term wishes, such as how long you plan to keep your car, before pushing forward with these options. For example, choosing to refinance can lower your payment, but restarting with a new loan will quickly negate any equity that you have built in your vehicle.
- Making a large payment toward the principal is the best option to lower your auto loan payment. By reducing your principal balance your monthly payment will shrink, and depending on the terms of your loan agreement, your interest due will shrink accordingly. Having a lower balance will also reduce early termination fees if you pay your loan in full ahead of time. The biggest downside of making a large principal payment is that you are using savings that could be applied to higher interest rate debt, and you are making a larger up-front cash investment in a depreciating asset. On the plus side, you will need to pay the principal eventually, so the sooner you make a payment means that you will pay less interest.
- Refinancing your automobile is a good choice if you have equity in your vehicle and if the current market dictates a lower annual percentage rate (APR) than your current loan offers. When refinancing, your new lender will pay off the original loan in full and begin billing you for the vehicle on a new retail contract. When refinancing, you need to have equity in your vehicle—or at least owe an amount equal to the retail value of your vehicle. If not, you will have to put money down to have your payoff nearer the retail value. A bank will not refinance a loan for an amount greater than retail value, as a customer who owes more than their car is worth may be more likely to stop making monthly payments.
- Consolidating your auto loan with other secured and unsecured debts can also help you lower your monthly payment. While consolidation loans often have higher interest rates than auto loans, no down payment is required, and consolidating the auto loan at a higher rate will offset when other debts are refinanced at a lower rate than you currently pay. While this does not work in all cases, consolidation may provide a single, lower lump-sum payment that can help you pay off all of your debt faster.
Using one of these three techniques to reduce your auto loan payment can help you free up money to put toward other bills and recurring expenses. If none of the above options work, you can contact your lender directly and look at options to extend your loan or defer several payments. However, your current lender will not be as willing to work with you as a lender who you plan to refinance or consolidate with.