Option : Lower Your Car Payment By Trading Down
Maybe you did buy too much car. That 8-seater is a pain to park. The leather seats on the luxury package minivan are not impressing your kids or their friends. You could sell your car and buy a more economical model. Making this option all the more interesting, and convenient, is the proliferation of new online services that will buy your used car, like Carvana. By entering some basic information about your car on one of these sites, you can quickly get a firm offer. If you agree, these companies will pick your car up at your home and bring a check with them. You can use that check to pay off your old car loan, and buy a smaller, less expensive vehicle.
Determine Your Current Balance And Payoff Penalties
The first step when planning on how to pay off your car loan faster is to look at the details of your loan. Some lenders make it difficult to pay off car loans early because theyll receive less payment in interest. In the best-case scenario, your loan was calculated using simple interest, which means your interest payment is based on your loans outstanding balance. If you pay off the loan early, youll make fewer interest payments.
Prepayment penalty
If your lender does allow early payoff, ask whether theres a prepayment penalty. Some lenders will impose a fee for early payoff, which could reduce any interest savings youd gain by paying the loan early.
Then, check your balance and make sure that any extra payments go toward the principal of the loan. Some financial institutions will automatically apply additional payments toward interest or other fees rather than toward reducing the principal. You may have to specify that a transfer or a check is a principal-only payment, so run it with your lender first.
Calculate how much youll save
After youve figured out how much you owe and whether your lender imposes prepayment penalties, use an auto loan calculator to determine how much youll save if you pay off the car loan early. If there are prepayment penalties, they can negate any savings.
Faqs About How To Lower Your Car Payments
Can you lower your car payment by paying more each month?
No, you cannot lower your car payment each month as it is established when you take out an auto loan. However, you can pay your car off sooner or possibly refinance to reduce your monthly loan payment.
Can you lower your car payment without refinancing?
Yes. You can apply for a loan modification if your lender offers it or swap out your current ride for one thats more affordable.
Will car refinancing hurt your credit?
When you apply for a new loan, your credit score will take a slight dip from the hard inquiry that is generated. But the impact is only temporary. The average age of your credit accounts could also go down and drop your score. Again, the effect typically wont last more than six to 12 months, and your credit score will rebound over time with timely payments and sound debt-management habits. But it is important to understand how refinancing a car affects your credit score.
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Save For A Down Payment
When you make a down payment, youre paying a portion of the cars purchase price before financing the rest. In doing so, you reduce the overall amount youre borrowing .
Lenders prefer when borrowers make down payments as it gives you some skin in the game. As a result, your loan is more likely to be approved. If thats not good enough, it may even have a lower interest rate.
But hows that lower your monthly payment?
Because youre reducing the principal amount youre borrowing at a potentially lower interest rate, youll pay less money over time than if you didnt make a down payment or made a smaller down payment.
Techniques For How To Pay Off Your Car Faster
No matter the size of your monthly car payment, there are five unique ways that vehicle owners can pay down their principles in a short frame of time. Remember that paying down the balance of your auto loan is never a race, but a marathon that requires dedication and determination to complete. Mapping out your projected time frame creates a framework that functions both as a nemesis and an accountability partner.
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Increase Your Credit Score
Keeping your credit in good shape may give you more loan options and help you get a better interest rate on your loan.
Before applying for a loan, it’s a good idea to check your credit score to see where you stand. If it’s not where you want it to be, consider taking steps to improve your credit health before you apply. These include:
- Pay down credit card balances.
- Pay off any collection accounts and bring past-due accounts current.
- Make all debt payments on time going forward.
- Check your credit report for any inaccuracies and dispute them if necessary.
When It Doesnt Make Sense
On the other hand, trying to pay off your auto loan early doesnt make sense when:
- You have other higher-interest debt. If you have credit cards, personal loans, and other debt with higher interest rates than your car loan, you should probably focus on paying those off first.
- You have bigger-picture goals. Going back to your financial health, you might reconsider an early payoff for your vehicle if it would hinder your ability to meet higher-priority financial goals like saving for a house.
When you refinance your auto loan, youre borrowing money to pay off your old loan and replacing it with a new one.
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Consider A Personal Loan
Many financial institutions offer personal loan products for purposes of debt payoff, home improvement projects, and other reasons. Personal loans may be an attractive option if youre unable to qualify for a loan refinance or manage to find a personal loan with better terms than a refinance.
However, personal loans arent often secured and may have higher interest rates than an auto loan .
If a traditional personal loan is out of the question, reach out to trusted friends and family. See if someones willing to offer a truly personal loan to help you pay off your car loan just make sure you pay them back.
How Do I Return A Car I Cant Afford
If you find yourself missing car loan payments regularly, you may find yourself at risk of repossession. However, you can lessen the negative impact this will have on your credit score, you can explain the situation to the lender and offer to surrender your car voluntarily. You’ll still take a hit, but future lenders may look favorably on it.
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Reduce Your Interest Rate
Since interest rates change regularly, there is a possibility that rates have fallen since you first took out your auto loan. Even a small decrease can make a difference over the life of the loan, so it is smart to look at what your current rate is and how it compares to current loan rates. Keep in mind that the interest rate you qualify for is based on your credit score, so make sure you have a basic understanding of how a credit score is calculated.
How To Reduce Your Total Loan Cost
Quick Answer
While a loan can help you cover the cost of a big expense like a house, car or wedding, youll likely end up paying back more than you borrowed with interest and fees. But with a little research and planning, you might be able to save on the total cost of your loan.
In this article:
Loans can help you finance important purchases such as a vehicle, education or home, along with just about anything else. But if you’re thinking about taking out a loan, whatever the reason, it’s a good idea to understand the total cost of the loan and how you might be able to reduce what you have to pay back.
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Shop For A Lower Car Insurance Rate
If you haven’t shopped around for cheaper car insurance in the past couple years, it’s time to review your policy and get quotes from other carriers.
If you’re happy with your current company, talk to your insurance agent about different strategies to lower your car insurance premium. Review all available discounts and evaluate the possibility of increasing your deductibles and/or lowering your coverage. Keep in mind that changing those factors will lower your premium, but if there’s an incident, you’ll be responsible for more out-of-pocket costs. Take a balanced approach.
If you’re open to change, get quotes from two or three other insurance carriers. Try your best to get quotes on the same coverage from each company so it’s easy to comparison shop.
Consider working with an independent agent to speed up the process of getting quotes and lowering your costs. Independent agents contract with multiple insurance companies.
Why Pay More Than Your Car Is Worth When You Can Pay Off Your Car Loan Early
About seven out of 10 people borrow money to buy their cars, and a car loan is one of the largest financial obligations you can have.
If youre one of them, you may have a loan that will take you 60 or 72 months to pay off. Thats five to six years! Thats too much interest to have to pay. So we want to help you get out from under that loan faster and save money on interest by giving you 6 ways to pay off your car loan early.
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Applying For Car Loan Modification
How To Pay Off Your Car Loan Early
1. PAY HALF YOUR MONTHLY PAYMENT EVERY TWO WEEKS
This may seem like a wash, but if your lender will let you do it, you should. With a payment every two weeks, youll end up making 26 half-payments per year. That adds up to 13 full payments a year, rather than 12.
If you have a 60-month, $10,000 loan, youll save only about $35 in interest, but youll repay the loan in 54 months rather than 60. Thats six months of your life back and can be an easier transition if you get paid every two weeks.
2. ROUND UP
Instead of just paying what is recommended, round your payments up to the nearest $50 to help repay your car loan more quickly.
Say you borrowed $10,000 at a 10% interest rate for 60 months, then your monthly payment is $212.47. With that payment, youll repay your car loan in 60 months, having paid $2,748.23 in interest.
However, if you decide to round up and pay $250 a month, youll repay your car loan in 47 months, having paid only $2,214.69 in interest saving you $533.54!
3. MAKE ONE LARGE EXTRA PAYMENT PER YEAR
This is the one-time version of rounding up. But it doesnt matter when you do it.
Lets say you borrow that same $10,000 over 60 months at 10% interest. If you make an extra payment of $500 a year, you will repay the loan in 49 months, having paid $2,279.35 in interest a savings of $468.88 in interest.
4. MAKE AT LEAST ONE LARGE PAYMENT OVER THE TERM OF THE LOAN
5. NEVER SKIP PAYMENTS
6. REFINANCE YOUR LOAN
DONT FORGET TO CHECK YOUR RATE
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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
Using A Car With Negative Equity As Trade
You can fill in the rest of that ad with the name of just about any car and just about any dealership in the U.S. and the promise will be as empty as your bank account because it promises negative equity.
The ad plays on every station in every market in America and you have to admit its enticing enough to make you stop and think about doing it. Someone else bails you out of a bad loan situation and puts you into a new car with no out-of-pocket expense. Whats not to like about that?
Heres a word of advice from car-buying experts: DONT EVEN CONSIDER IT!
Trading in a car with negative equity to take on another car loan with even more negative equity is like throwing gas on a fire because its the only liquid you had handy. You just increased the chances for a serious financial meltdown and here is an example of why.
Lets say you owe still owe $10,000 on a car that is only worth $5,000. The dealer will pay off the $5,000 difference, but then roll that amount into the loan on your next car. So, if you needed to borrow $20,000 for the new car, the dealer rolls another $5,000 into the loan to cover the cost of paying off your previous loan and now youre borrowing $25,000.
Not only will your monthly payments be higher , but you likely will be paying higher interest on the loan.
And, dont forget, youre going to add more negative equity to your situation when you calculate the 20% depreciation in value the new car will lose when you drive it off the lot.
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If You Cant Refinance
There are a few other options for those who are experiencing problems and may not qualify for refinancing. The first thing you can try is simply talking to your lender and seeing if they can help. Let them know youre worried about falling behind on payments the worst they can say is no. Additionally, trading the vehicle in for something more affordable is also a viable option.
Once you get behind on payments, it can really start to harm your credit score, making it harder to get an auto loan in the future. If you default on the loan, youre risking repossession and major damage to your credit. Once you start missing payments, it becomes an uphill battle.
If you have bad credit, and its getting hard to keep up with your payments, we want to help. At CarsDirect, we’ve teamed up with dealerships around the country that offer special financing for those with bad credit, and other unique credit situations. To see if we can find a dealer in your area that may be able to lend a hand, simply fill out our free car loan request form.
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Renegotiate Your Loan Terms
Lenders often allow you to defer a payment when youre facing financial hardship. This can take the pressure off for a month or two, but it can lead to paying more overall. This is because interest continues to accrue during deferment.
You can also request a modification of your loan. Your lender may be willing to extend your term which means paying more interest or reducing your interest rate. The latter is better financially, but it may be difficult to qualify if you dont have good credit.
