Maybe your personal finances have taken a hit due to the pandemic or some other emergency. Or perhaps your car loan payment has always been too high in relation to your income and other monthly expenses.
No matter the reason, if you find yourself burdened by a car payment you can no longer afford, the good news is there are solutions to the problem. Below we’ve listed six ways to help you reduce your car payment and stay within your budget.
1. Adjust Your Auto Loan
If you’re worried you won’t be able to make your car payment, call your lender before you get too far behind — you don’t want missed payments to damage your credit. Some banks will pause your payment for a month or more with a temporary loan extension. Usually this is a one-time courtesy for borrowers with a good track record of on-time payments. Some institutions, however, let customers pause their payments once a year. Of course, the missed payments get tacked on to the end of the loan, which could result in you being charged more interest in the long run.
2. Trade in Your Car
While you’ll typically get less for a trade-in than you would in a private sale, this option can still be to your advantage. It usually works best if you’re not “upside down” on your car payments, meaning the car is worth at least what you paid for it. Before you head to the dealership to for quote on a new set of wheels, get your car appraised to find out the trade-in value, so you can negotiate smartly.
3. Refinance Your Loan
If your cash-flow issue is only temporary, and you have a strong credit rating, you may be able to lower your payments by getting better terms from a refinance.
Most lenders, however, will want to see that you’ve been making the loan payments regularly for at least a couple years. If you’re approved, one of the following will happen:
- If you qualify for a lower interest rate, your monthly payments will decrease and you’ll pay less interest over the life of the loan.
- If you don’t qualify for a lower interest rate, you can still extend the payments over a longer period. This will reduce the amount due each month, but you’ll pay more in interest.
4. Have Your Loan Assumed
Not all car loans are assumable, so you’ll need to speak with your lender. If your loan is assumable and you can check several boxes, you may be able to find a buyer willing and qualified to take over your loan. For your lender to consider it, you’ll need to have low-interest terms and the potential buyer will need to meet certain credit and income requirements too.
5. Re-balance Your Budget
Most experts cite allocating 15–20 percent of your total budget toward your monthly car payment. (And remember to factor in other car-related expenses like gas, insurance, and maintenance, as well.) The figure you earmark for your car payment can be higher, however, depending on your lifestyle choices.
As long as your budget balances, you can put more toward a car payment if you’re willing to go without something else in the discretionary part of your budget. For example, if you’d rather drive a nice car than eat out frequently and buy new clothes regularly, then a higher car-loan payment is doable.
6. Sell Your Car
If none of the other options listed work for your situation, you may have to consider selling your car before you get too deeply into debt over missed payments and an unrealistic budget. Of course, getting rid of your car and the payment that comes with it, only makes sense if you either have a second set of wheels or have a robust local public-transit system to get around. You’ll also need to consider your car’s re-sale value. If you can’t sell it for enough to pay off the loan, you would need to make up the difference.