Is a Lower Monthly Car Payment Always Better? 5 Essential Questions Answered

When managing your finances and making significant purchases like a new car, understanding the nuances of car loans and lower monthly payments is crucial. Word of mouth might tell you that a lower monthly car payment is better, but this advice varies depending on the situation. 

Many factors come into play when determining the best approach for your situation, from credit scores to down payments to loan terms. This article explores various aspects related to car payments and loans to help you make informed decisions.

If having a lower monthly car payment means you have to refinance your auto loan, it might not be the best situation for you. On the other hand, a lower monthly car payment without having to refinance is totally worth it.

This article explores how to have a lower monthly car payment and when it’s not good for you. Let’s dive right in. 

Is a lower monthly car payment better?

Let’s imagine a scenario. You recently purchased your car, but the monthly car payment is too much and is seriously damaging your personal finances. 

This situation is common in the United States, and with soaring car prices, it has become even more prevalent. So, this might lead many to believe that a lower monthly car payment is better.

A lower monthly car payment may be better, depending on how you lower it. There are many ways to do so, some better than others. 

Buying a car on a loan

It’s not usual for someone to be able to pay for a car upfront, so many Americans turn to a car loan instead. This is when the buyer puts a down payment for the vehicle and then finances the rest of the purchase with a bank or lender.

hen, the lender charges interest over the total money the buyer needs. 

How expensive are car loans?

A new-car loan can last around 67.5 months (around six years), which is a long time. So, having a high monthly car payment could be overwhelming.

The average loan is around $30,000. If you take out this money for five years, the monthly payment will be higher than if you take it out for six or seven years. 

However, the end amount that you pay will be higher. If you take out this amount at 3.52% for five years (60 months), you’d be paying around $2,800 in interest. 

The same amount, financed at 72 months, will end up with around $3,300 in interest. Finally, extending it to seven years could cost you around $5,000 in interest. 

Therefore, though we might be tempted to take out a longer loan because it leaves us with lower monthly car payments, we might end up paying more in the long run. 

How long is the ideal car loan?

Though the ideal car loan varies depending on the buyer, it shouldn’t be too long. According to Consumer Reports, it shouldn’t extend more than 48 months, as anything longer could imply a financial burden. 

The ideal car loan isn’t only about the length. You also need to understand the total cost of your car. 

The total cost of ownership means calculating the overall interest rates. As we showed you before, this can add up over time. 

So, what happens when your car payments are too much? Can you have a lower monthly car payment without refinancing?

How to lower car payments without refinancing

We’ve had people reach out and say: “my car payment is too high. What can I do?”

Before we dive into how to reduce your car payments without refinancing, let’s discuss refinancing. Refinancing a car loan means taking out a new one to pay off your previous loan. 

Refinancing usually implies a lower interest rate or other favorable conditions for you. On the other hand, the loan is also expected to extend for longer than the previous one. So, the loan is more extended, while you have a lower car payment. 

Let’s say you do not want to refinance because it can be a financial burden. So, how do you lower car payments without refinancing? Let’s see:

Loan Modification

This isn’t refinancing per se. Instead, it’s changing the conditions within the existing loan. If you’re struggling with payments, contacting your lender for a loan modification could be beneficial.

This might include reducing the interest rate, extending the loan term for more manageable payments, or temporarily deferring payments.

Trade-In for a Less Expensive Vehicle 

Trading in your current car for a more affordable model can lower your payments, especially given favorable market conditions for trade-ins. This straightforward process can be negotiated with dealerships for the best offer. 

If you’re planning on doing this, do thorough research on the car you want and its market value so you can negotiate a good trade-in value. 

Sell Privately and Buy a Less Expensive Car

Selling your car can yield more money than trading it in, offering a larger down payment for your next vehicle. With current market trends, selling your car can be a gamble but can pay off. This can apply to a new or used car. 

Switch to Leasing

Leasing a car instead of buying can help you get a lower monthly payment. However, it’s essential to be mindful of leasing terms to avoid extra fees.

When Refinancing Might Be Better

Refinancing could be advantageous if you qualify for a lower interest rate and can secure a loan term similar to your current one, avoiding extended interest costs. It’s beneficial for preserving credit scores and preventing repossession.

How Does Your Credit Score Affect Your Car Loan?

A credit score is vital in an economy such as the US, where we depend on loans to buy many things. The unfortunate reality is that for many Americans, car payments are just a normal way of life.

That’s where credit score comes in. A good credit score can significantly impact the terms of your car loan.

After all, lenders typically offer lower interest rates and better loan terms to individuals with high credit scores. That’s why you may face challenges in securing favorable loan conditions if you have a lower credit score.

However, several options exist for individuals with lower credit scores, such as seeking a co-signer or opting for specialized bad credit auto loans.

Improving your credit score is essential to secure better terms for your car loan. Simple steps like paying bills on time, reducing outstanding debt, and regularly checking your credit report can help boost your credit score over time, enabling you to access lower interest rates and monthly payments.

These actions take time, but they pay off in the long run. 

Should You Make a Large Down Payment on Your Car?

Deciding whether to make a sizeable down payment on your car involves weighing the advantages and disadvantages. While a larger down payment can reduce the loan amount and potentially lower your monthly payments, it also ties up significant cash upfront. 

Alternatively, you can explore other strategies to lower your car payment, such as negotiating for a lower interest rate or choosing a more affordable vehicle within your budget.

Understanding how a down payment affects your monthly car payment is crucial. By making a larger down payment, you can decrease the principal amount borrowed, resulting in lower monthly payments and potentially saving money on interest over the life of the loan.

However, it’s essential to consider the car’s value and ensure that the down payment aligns with its worth.

When Does It Make Sense to Pay Off Your Car Loan Early?

While paying off your car loan ahead of schedule may seem beneficial, it is essential to weigh the pros and cons.

Paying off your car loan early can save you money on interest payments and free up your budget for other expenses. However, it may also impact your credit score and limit your financial flexibility in the short term.

If you decide to pay off your car loan early, consider implementing strategies to manage your finances effectively.

This includes creating a repayment plan, budgeting wisely, and allocating extra funds towards your loan payments. Paying off your car loan early can reduce financial stress and achieve greater financial stability.

When negotiating loan terms with your lender, consider factors such as the interest rate, repayment period, and total loan amount. By understanding loan terms and their implications, you can make informed decisions that help lower your monthly car payment while managing your finances effectively in the long run.

Closing thoughts on a lower car payment

When you get a car loan, you might think having a small payment every month is great. But, if that means your loan lasts longer, you’ll end up paying more money in the end because of interest.

It’s like buying a toy on layaway and paying more for it because you took longer to pay it off. So, it’s crucial to consider the whole cost, not just the monthly bits.

There are other ways to make your car payments smaller without stretching out your loan. You could change your loan a little with the bank, trade your car for a cheaper one, sell your car yourself, and then buy a cheaper one, or lease a car instead of buying.

Each way has its ups and downs, but they can all help make your payments more manageable without making you pay a lot more later.

Deciding whether to put a big chunk of money down when you buy a car can be tricky. A big down payment means your monthly payments will be less, but it also means using a lot of your savings right away.

Also, if you think about paying off your car loan fast, it can save you money on interest, but make sure it doesn’t mess up your budget or credit score. It’s all about finding a balance that works for you and helps you save money in the long run.