How to Bring Down Your Monthly Car Loan Payments

How to Bring Down Your Monthly Car Loan Payments - 6 ways you can try to bring down your monthly auto loan amortization.
One of the most frequently read posts in this blog is the one about Car Loan rates. And consequently I get asked a lot about various stuff regarding car loans. But the most popular question seems to be about bringing down the monthly amortization/payments. So I thought it would be a good idea to tackle it in more detail here.

So what can you do to bring down your monthly car payment?

Let's tackle them in chronological order:

Make a bigger down-payment

This is the best but also most painful way. Why the best? A big down-payment means borrowing less overall and consequently paying less in interest. Pretty much the "best of both worlds" when it comes to debt.

But of course, not everyone has a big pile of cash to just hand over. So this isn't an easy thing to accomplish. My advice is to really save up for that car, rather than just go for it because of a low-down-payment promo.

Loan from a bank, not the dealer

Why? Because dealers charge higher interest. And so buying the same car and paying for it over the same number of years will still have you paying more each month and in total.

Pay more than the amortization when you can

Just like with credit card debts (though not as onerous as that), paying more than the "minimum" means you end the loan quicker.

However, check your contract first as not all banks have this option. If it isn't an option, try talking to your bank's branch manager if they can allow this. If it isn't possible, try the next option.

Make a lumpsum payment

By paying a (typically large) lumpsum, you can pay off a big portion of the loan and end up having to pay less monthly. But just like the above option, this isn't always available. It's best to talk with your bank's branch manager to make this arrangement.

Just be aware that unless the two preceding options are in your contract, you really have to negotiate with the bank to make them happen. That can include explaining convincingly why you now need/want this option when previously you didn't. Also explain the benefits for the bank and yourself. But don't let that discourage you. After all, who refuses to be paid earlier right?

Re-negotiate the loan to extend it

This is more of a second-to-last resort option. You end up paying more overall. And your bank may not be willing to do this. So why try it?

Well, in case of financial distress (say, loss of job or having to switch to a lower-paying job), this is kind of the only option that could work. And in this case, the bank does end up getting paid more in interest payments, so that's one reason they might agree to this.

But this is going to be a relatively tough negotiation. Come prepared with documents and computations to make a compelling case to them.

Take out another loan to pay off the current car loan

Basically the same as a balance transfer with a credit card. Find out how much is left of the loan, and get a new loan from another bank to pay off the current loan. However, this is usually best used as a negotiation tactic or bargaining chip rather than as an actual option.

That's because there are pitfalls.
  • It's not sure that you can just pay off the principal and save on interest payments. Most contracts stipulate that you pay the principal and the total interest even if closing the loan early. 
  • This usually adds to the interest - 26% total interest paid to the original bank, plus whatever interest the new bank charges.
  • It's also not a given that this can reduce your monthly payment. You'll have to check and negotiate the new contract to ensure that.

But in some instances it can work.
  • If the new bank charges much lower interest
  • And the current loan allows you to pay off the principal

There's a few ways to lower your monthly payment, but the best option starts before getting the loan: get you finances in order, save up, and get ready to make a large down-payment.

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photo credit: Mille Miglia 2016 via photopin (license)

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