Cut Your Car Payment in Half

Cars have become an expensive commodity and most people feel they pay more than they are comfortable with. Monthly car payments are a major part of many folks’ financial expenses and are an obvious target for reductions.

There are several ways in which car payments can be lowered. Depending on individual situations, some ways can be better and more practical than others. And there can be tradeoffs which factor into the equation.

Let’s take a look at some possible methods for cutting your car payments.

Existing Loan on Current Car

There is only one way to reduce monthly payment amount on an existing car loan — refinance the loan to get a better interest rate, and/or by extending the length (term) of the loan.

Getting a better interest rate is only possible if, indeed, rates are now better than when you originated the loan. This can easily happen if your original rate was based on a marginal credit score but now your score has improved. Simply shopping around to various banks, credit unions, and online lenders can also lead to better rates.

The second method mentioned here was that of extending the term of your loan, which can have drawbacks. First, a long extension can push the payoff date out beyond the expected life of the vehicle, especially if the vehicle is an older one. This could mean that you are still paying off a loan on a car that has gone to the junkyard.  It also means the total cost of the loan increases due to the additional amount of interest paid, even if the rate didn’t change.

Whether you can cut your monthly payment in half depends on the size of any interest rate reduction and/or the additional time you can add to the loan. The best way to find an answer for your particular situation is to simply visit a local bank or credit union and discuss a refinance loan.

New Car – New Loan

If your current car payments are higher than you like, trading for a new car — brand new or used — may be a solution.

The ideal situation would be if you have trade equity (not being upside down on your loan) in your current vehicle that can be used as a down payment on another, less expensive, vehicle. A relatively small amount of negative equity might also work. However, a large amount of negative equity might negate any significant benefit of a trade, unless you have cash that can be used to offset it.

Let’s look at an example.

We’ll assume that you currently have a 3 year old $50,000 car with a 5.5% interest loan for 60 months. Your monthly payments are $955.06.

Now, after 36 months, you still owe $21,659. Let’s assume that the trade value of your car is now $25,000 (depreciation for an average vehicle is 50% over 3 years), meaning you have $3341 in trade equity that you can use as a down payment on another car.

You can now buy another car — brand new or used — for $28,400 and get payments of only $478 a month, which is half of your previous payment amount. We assumed the same interest rate and term as the previous loan.

New Car – New Lease

If you’ve read much of this web site, you know that leasing offers lower monthly payments than a loan for the same car. In fact, payments are typically a little more than half, assuming same finance rate and term. Leasing is almost always limited to brand new cars.

Of course, the drawback to leasing is that you are restricted to a specified amount of miles and generally build no ownership equity — in exchange for the lower payment.

Let’s take a look an an example. We’ll assume you currently have the same $50,000 vehicle and loan as in the previous example above.

Again, you decide to trade your current car after 3 years, with $3341 in trade equity that can be used in a new car lease. We’ll make one change however. Most leases are for a term of 36 months, not 60 months as for the loan example above. Finance rate remains the same, as does the 50% rate of depreciation for both cars.

You can now lease a brand new car valued at $33,200 and have a monthly payment amount of $477, about half your current loan payment amount. If you wisely choose a vehicle that has a higher residual value (lower depreciation rate) of 60%, you can afford to lease a car valued at just under $40,000 for the same payment.

Summary

There are several methods for cutting monthly car payments in half. Refinancing an existing loan is one way. Trading for a less expensive vehicle is another, even if you have a current outstanding loan. Leasing a brand new vehicle offers the least expensive way and the opportunity to get more car for the same payment amount.