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How Can I Lower My Car Payment?

Finance | 05/09/2022 22:00

Times are hard right now for many people, and the ballooning inflation we are seeing doesn’t seem to be letting up. It leaves many people to wonder, “how can I save some money” – and specifically, “how can I lower my car payment?”

If you are like most people, you are probably overpaying on your car payment every month. In fact, by the end of 2021 the average car payment was over $640 per month. That’s over $7500 per year, not including insurance, gas, maintenance, etc. Long story short: owning a car is very expensive, especially in 2022.

But fear not – today we are talking about how car payments work and how you can get lower monthly car payments.

Here are our top tips to help get a lower car payment.

How are car payments calculated?

In order to determine a car payment, you will need to know the following information:

  • The cost of the car, also called the principal

  • The term of the loan 

  • The interest rate

  • Sales tax

  • Additional fees

You can go online and find a car payment calculator that will help do the heavy lifting for you. For example, say you are buying a $30,000 car with a $5,000 down payment. You have a 5 year loan at 4.5% APR with 7% sales tax and $300 in fees. 

Total Loan Amount: $27,400 ($25,000 cost of car + $2,100 tax + $300 fees)

Total Cost of Interest Over 5 years: $3,2429.12

Total Cost of Car: $35,649.12

Monthly Payments: $510.82

The monthly payments are divided between the principal balance and the interest on the loan. Car loans are front-loaded amortized loans, which means that towards the beginning of the loan, more of the payment goes towards the interest on the loan. Towards the end of the loan, more of the payment goes towards the principal. A car payment amortization schedule can help you keep track of how your payments are divided. 

A car payment amortization breakdown for our above example shows how car payments are divided between principal and interest:

Year 1

Beginning Balance: $27,400.00

Interest: $1,130.73

Principal: $4,999.11

Ending Balance: $22,400.91

Year 2

Beginning Balance: $22,400.91

Interest: $901.07

Principal: $5,228.77

Ending Balance: $17,172.15

Year 3

Beginning Balance: $17,172.15

Interest: $660.86

Principal: $5,468.98

Ending Balance: $11,703.19

Year 4

Beginning Balance: $11,703.19

Interest: $409.62

Principal: $5,720.22

Ending Balance: $5,982.99

Year 5

Beginning Balance: $5,982.99

Interest: $146.83

Principal: $5,983.01

Ending Balance: $0.00

Early on in your loan, you are paying more in interest, and later on you are paying more in principal. But the monthly car payments will stay the same every month.

What is a good APR for a car loan?

Your monthly car payments are primarily dictated by your starting principal, car loan APR, and term of repayment. While the starting principal and repayment term are up to you, you will need to shop around for the best car loan APRs. The car loan APR you are offered will be based on the following:

  • Prevailing market rates

  • Your credit score

  • Your debt-to-income ratio 

  • Your loan term

  • Is it a new car or used car (used car loan rates tend to be higher than new car rates)

The rate you are offered depends a great deal on your credit score. The higher your credit score is, the lower the car loan APR. Credit scores are broken down into the following categories:

  • Exceptional (Super Prime): 800-850

  • Very good (Prime): 740-799

  • Good (Near Prime): 670-739

  • Fair (Subprime): 580-669

  • Very poor (Deep Subprime): 300-579

In the last quarter of 2021, the average car loan APRs of each category were as follows:

  • Exceptional (Super Prime): 2.47%

  • Very good (Prime): 3.51%

  • Good (Near Prime): 6.07%

  • Fair (Subprime): 9.41%

  • Very poor (Deep Subprime): 12.53%

The interest rates for those with very poor credit were about five times the interest rate for those with exceptional credit. And that can add up to a lot of money over the length of your loan.

How to get a lower monthly car payment before you buy

To avoid having high monthly payments from the beginning, you want to do your research ahead of time. Follow our tips below to stop high monthly car payments before they even start. 

Make a down payment

Making a down payment will reduce the total amount of your loan, your principal. The larger the down payment, the lower your monthly payments will be. Aim to pay at least 20% of the total cost as a down payment. This will also reduce the chance of your loan becoming underwater (when you owe more on your car than your car is worth).

Shop and compare

Shop around for the best deals on the car you want. The lower the sticker price is on your new car, the lower your monthly payments will be. Be sure to look at Kelley Blue Book and Edmunds before you even step into a dealership so that you know how much money the car you are interested in is actually worth. It’s easy to get talked into a bad deal by a smooth-talking salesman, so do your homework beforehand.

Choose a longer repayment term

Selecting a longer repayment term from the beginning will result in lower monthly car payments. But remember: the longer your repayment term, the longer you will be paying interest. This can add up to a lot of money by the end of your loan.

Make sure your credit is in good shape

To ensure you get the best car loan APR offers in the first place, make sure your credit score is in good shape from the beginning. 

  • Request a copy of your credit report and review thoroughly for errors or mistakes.

  • Commit to making consistent, on-time and full payments to increase your score.

  • Pay down any large debts that may be skewing your credit utilization ratio.

  • Avoid opening any new accounts or triggering any hard inquiries in the year leading up to your financing. 

Working on your credit score can save you a lot of money in the long run and is something you should take very seriously. Bumping your score up can result in hundreds if not thousands of dollars in savings.

How to get a lower monthly car payment after you buy

If you are overpaying on your monthly car payments, here are our top tips to lower your payment.

Refinance your car loan to a lower APR

Refinancing a car loan is when you pay off your existing loan with a new loan. If you can secure a lower APR, this can save you a lot of money. You may find a lower car loan APR if:

  • The market rates have decreased

  • Your credit score has improved

  • Your debt to income ratio has improved

Average market rates have dropped significantly in the past two years, so chances are you will find a lower car loan APR, even if your credit score hasn’t improved much.

Refinance your car loan to a longer term

If you are currently on a shorter term loan (say 36 months), refinancing your car loan to a longer term can drastically lower your monthly car payments. 

Talk to your lender

If you are struggling to keep up with monthly payments, try talking to your current lender about your situation. If your credit score has decreased or your current loan’s prepayment penalties make refinancing your car impossible, talking to your lender may be your best option. They may be able to put you on a more manageable payment plan or suggest other options to you. The Consumer Financial Protection Bureau suggests asking your lender how any of these options might affect your credit.

Add a co-borrower

If your credit score isn't better than what it was when you originally financed your loan, adding a co-borrower may be a good option for you. When you refinance a car loan, you can add a co-borrower to your loan and possibly reduce your interest rate and secure better terms. If they have good credit, they will be eligible for a better interest rate. 

Those are our top tips for getting a lower monthly car payment.

Be sure to understand how car payments are calculated before you commit to any type of financing. It’s also important to do your homework to make sure that you are getting a good and manageable financing deal in the first place. But if you already have a less than ideal car loan situation, refinancing your car loan may be your best option.

At Auto Approve, we specialize in car loan refinancing and know how much money it can save you every month. We have relationships with lenders across the country and can help you start saving money today. So don’t wait – find out just how much money you could be saving with lower monthly car payments. contact us today to get your free quote!


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