With $1,000 Car Payments More Common, Here’s How to Cut Yours

You know inflation is bad when your monthly car payment hits a thousand bucks.

For an increasing number of drivers, that’s the reality. A record number of Americans are paying at least $1,000 a month for their vehicles, according to new findings from the auto inventory site Edmunds.

Nearly 16% of car buyers who financed a new vehicle in the fourth quarter of 2022 have monthly payments reaching four figures. That share of car buyers more than doubled in two years.

Even used car buyers aren’t totally safe. More than 5% of buyers who financed a used vehicle in late 2022 are paying at least $1,000 a month, according to Edmunds. That number more than tripled in two years.

Analysts fear that some of these high-dollar borrowers are getting in over their heads. They say people who buy cars today are at risk of going underwater on their car loans down the road as used car values decline.

So we’re here to discuss two things:

1. How to lower your car payment, and
2. How to trade in a car that has negative equity.

We’ve got four tips for each.

4 Ways to Lower Your Car Payment

It looks like this is the future for more and more of us, since cars and car loans are more expensive than ever. The average sticker price of a new automobile has shot up to nearly $46,000.

Interest rates on car loans have risen to an average of 6.5% on new vehicles and 10% on used vehicles, compared with 4% and 7.4% two years ago, according to Edmunds.

Here are some ways to get a lower car payment:

1. Save Up for a Larger Down Payment

Just like with a mortgage, the more money you put down at the beginning, the lower your payments will be over the life of your auto loan.

For example, if you put a $5,000 down payment on a $25,000 car with 7% sales tax and a 4.5% APR, with a five-year loan, you would end up with a monthly car payment of a little over $400.

With no down payment and those same terms, you’d have a monthly payment of nearly $500.

2. Get Preapproved for a Loan

Get a loan preapproval. Shopping around for a preapproved auto loan for your new loan potentially helps you snag a lower interest rate than the one a dealership would offer.

By talking to lenders before you start shopping, you’ll not only know how much car you can afford, but you’ll have negotiating power for the loan’s interest rate as well as the length of the loan.

3. Buy a Used Car

They’re more affordable. Here’s our ultimate beginner’s guide for how to buy a used car.

If you’ve ever heard someone refer to a car as a depreciating asset, it’s true. The longer you have a car, the less it’s worth. The first year of owning a new vehicle is when depreciation really packs a punch.

When you buy a used car, the original owner has already taken that initial hit on depreciation and the price you pay accounts for that.

Just because you’re buying a used car doesn’t mean you’ll be stuck with a clunker that was manufactured decades ago. Cars that are just a few years old often hit dealership lots when their previous owners reach the end of their lease.

4. Refinance Your Loan

In our article “7 Ways to Lower Your Car Payment & Help Your Budget,” we suggest that you consider refinancing your existing auto loan.

Refinancing can make sense if you’re looking to lower your car payment over a longer term.

While you’re at it, you might be able to get a lower interest rate as well. Interest rates have likely risen since you bought your car, though. On the flip side, your credit score might have gone up, too.

Checking on your refinancing options may be worthwhile. Keep in mind, though, that a longer term means more interest paid over the life of the auto loan.

That leads us to our next subject…

4 Tips for Trading in a Car With Negative Equity

Edmunds analysts worry that in the near future, more people are going to be trading in cars that they still owe money on.

What if you get stuck with an underwater car loan on a vehicle you need to unload? Let’s start with the best idea and work our way down.

1. Calculate Your Car’s Equity

Before we get ahead of ourselves, are you sure your vehicle is worth less than what you owe? Here’s how to calculate the equity in your vehicle:

Value of your vehicle – loan payoff amount = equity

You can find out how much your vehicle is worth by checking Edmunds, Kelley Blue Book and the National Automobile Dealers Association’s Guide.

When figuring out how much you owe on the loan, use the loan payoff amount and not the principal, as the payoff amount may include things like fees and taxes you still owe on.

2. Hang Onto Your Car

This is really the best option, financially speaking. Yes, it isn’t always an option — especially if your current car needs expensive repairs — but you should at least weigh the cost of repairs vs. the long-term financial benefits of holding onto your old wheels.

3. Sell the Car Yourself

Here’s the hardest way to get yourself out of your underwater car loan, but it could also be among the most lucrative: Sell the car yourself. The payoff for the extra effort could be worth your time as opposed to trading your car in at the dealership.

4. Roll Over the Amount You Owe Into a New Auto Loan

This is the worst option, but sometimes you’ve got to do what you’ve got to do. You’ll end up with a bigger loan and a higher interest rate.

If this is your only option, you might consider downsizing to a cheaper car if possible. That way, you could be looking at a smaller payment even after adding the underwater debt amount into the new loan. Be warned that car prices have been going up, though.

None of these options will necessarily prevent you from starting out underwater on your next car loan, but they can help reduce the time you’ll spend climbing out of the hole.

Remember, unless you’re wealthy, a $1,000-a-month car payment is something to avoid if possible.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.