How to Save Money on Your Car Payment in 2023
The average payment for a new car has reached On average, drivers are spending over $700 and $500 each month for new and used vehicles, respectively, according to Experian’s fourth-quarter automotive finance report. Insurance costs an average of $2,014 per year sourced via Bankrate. This is mainly due to inflation, as well as the high interest rates as bank rates climb to keep up with changes made by the Federal Reserve. If you already purchased a car and are feeling squeezed, there are some great ways to help save you money on your car payment.
Refinancing is an easy way to lower your car payment. Here at Ava we work with people to help save them money on their debts by building their credit to qualify them for better loans and financial tools. Refinancing Auto loans is something we have a great deal of experience with. Even though refinancing works great there are other options to consider as well.
How to get a lower car payment on a car you already have
There are a few ways to go about tackling a heavy car payment. The first option to try is to call your lender directly and renegotiate your terms. The second option is to refinance the vehicle by shopping around for better loans with other lenders. The last option is to sell or trade in the vehicle for a more affordable option.
Exploring options with your current lender
This tactic is usually a short term fix and not a long term one. If you are having issues with your car payment due to short term financial trouble then lenders may extend you certain options. Lenders can offer temporary forbearance which means you can put off your payments for a certain amount of time, or they can lower the amount of your payments temporarily.
These options are usually granted under needful circumstances, so if you're trying to save money in the long run this won't accomplish that, instead it may help to alleviate some stress from a short term financial struggle.
One last option you can take with your current lender is voluntary repossession. This is where you turn over the car to your lender under the admission that you can no longer afford to make payments, the lender will then sell the vehicle to make up the remainder on the loan. This is seen to be favorable and more responsible than falling behind on your payments and letting the car fall into normal repossession.
Get rid of your car by selling or trading it in
While many people would ideally like to keep their car, it's perfectly viable and many times the responsible choice to sell a car that is too much of a financial burden. It's important that you consider your equity position when selling your car.
If your auto loan had high interest rates and a long term the car may have depreciated faster than the principal was paid off. This means you may owe more than the car is worth. This is negative equity which you will have to pay when selling your car. This makes selling your car harder and requires you to pay some money up front. The opposite can also happen, if you paid off a car faster than it depreciated you may have positive equity. In which case you can get some money back when selling your car as the sale price will be higher than the remainder on the loan.
Another option is to trade in your car. When trading in a car you can take you can choose a more affordable car to make sure your monthly payments are lower. In some cases you can also take negative equity from your old car and roll it into the loan of the new car. Which will make payments more expensive, but if you pick the right car it can still be more affordable than before.
Save money with auto loan refinance
A better option for the long term is to refinance your auto loan. Refinancing your auto loan replaces your original loan with another. This is most effective when you can get a lower interest rate for your loan. Getting a lower interest rate is dependent on two main factors, your credit score and interest rates set by the federal reserve.
By getting a lower interest rate you can instantly lower your monthly payment for the remainder of your loan and save you money on total interest paid.
If you can't get a better interest rate on your car loan, then you'll have to pick a loan with a longer term in order to spread the payments out. This means it will take longer to pay off the loan as well as make you pay more in interest over time. This is not recommended because over time you will not benefit financially and the car may depreciate faster than you pay it off.
How to get a lower interest rate when refinancing a car loan
If you've decided you'd like to refinance your car, the best thing to do is to ensure you can get a better interest rate on your auto loan than you did before. This can be done two ways:
- Wait until the federal reserve lowers interest rates
- Qualify for lower interest rates with a better credit score
Waiting for the federal reserve to lower rates is not your best move, especially in 2023 where rates have been raised to combat inflation.
To be able to lower your interest rate as soon as possible we recommend raising your credit score, especially if you are in the ranges below excellent. By raising your credit score even 15-30 points to start you may find yourself in the next segment and qualify for better interest rates.
How to get the lowest payment when buying a new car
We've covered how to save money on a car loan if you've already purchased a car, however it's also important to learn how to get the best deal possible at the very beginning. To ensure you have the lowest possible payment there are a couple of factors you need to be aware of. The total of the loan amount, the length or term of the loan and the interest rate you get on it.
Know what you should expect to pay
In the last twelve months, there has been a continual surge in the prices of vehicles. As of January 2023, the average cost of a pre-owned vehicle stands at $27,633, while the cost for a fresh-off-the-manufacturing-line car is $49,388 — marking an elevation of 5.9 percent compared to the previous year. Due to these amplified expenses, motorists are resorting to higher loans to afford their desired transport.
Key statistical information:
- Average monthly payment for new cars: $716
- Average monthly payment for used cars: $526
- In 2022, 80.9% of new vehicle buyers chose financing, a decrease from 85.3% in 2021.
- Almost 30% of all auto loans in the same period were provided by credit unions.
- The monthly average car insurance cost: $168
- New loan amounts increased by 4.04% in Q4 2022.
- SUVs and wagons took up a 60.7% share of financed vehicles in Q4 2022.
- Total loan balances expanded by 8.56% in the same period.