Car Payments for Many Americans Are Now More Than $1,000 per Month. Here’s How to Stay Ahead of Your Loan Payment

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Yes, you can save money on your auto loan. 

For many Americans, car payments are a fact of life. The average cost of a new car is close to $50,000, a record high. Combined with higher interest rates, monthly car loan payments for U.S. drivers are now more than $1,000 per month. With loan payments also reaching all-time highs, it can be easy to get in over your head and be stuck in an endless cycle of debt. Here’s how to stay ahead of your car loan payment and save money on it every month.

Understand your financing options before you buy

Before you sign on the dotted line, it pays to shop around for the best car financing options available for your car purchase. Take a few moments to understand the different types of loans and their associated terms before deciding which is best for you. Consider factors such as interest rate, loan term, and other fees that could add up over time.

Before you step on a car lot, make sure you get pre-qualified. Loans from banks or credit unions are typically cheaper than loans from a dealer. Knowing what type of loan works best for you can help you save hundreds or even thousands of dollars over the life of your loan. If you are buying an electric car, do your research to find EV tax credits and other possible benefits.

Keep your car longer to avoid buying right now

One of the biggest reasons car prices have skyrocketed the past few years is due to supply chain issues, a shortage of microchips, and pent-up demand. In addition, in the wake of the Federal Reserve’s rate hikes (which indirectly impact consumer borrowing rates), the average auto loan rate increased by 2.8 percentage points to 10.6%. This increase means car buyers are paying 8% more on a new car’s payments due to the interest hike alone. Based on your personal finances and your needs, it may be best to wait to purchase a vehicle until next year. Interest rates should eventually go back down and supply chain issues should stabilize, lowering the price of cars.

Refinance your loan

Interest rates are much higher than they were a year ago. If you are currently stuck with a high interest rate loan, shop around to see if you can refinance and get a loan with lower interest. It may take some time before rates come down, so it is important to constantly research. In addition, if your high interest rate is due to a low credit score, take steps to improve it as well as your overall financial situation.

Refinancing can help lower your interest rate, potentially saving you money on interest charges in the long run. Just make sure you do all the necessary research — including understanding any additional costs that may be associated with refinancing — before making any decisions about refinancing your loan.

Make lump-sum payments when possible

Making lump-sum payments whenever you can is one way to pay off your car loan faster and save money in interest charges over time. If there’s ever extra cash available in your budget (such as from a tax return or bonus at work), it can be helpful to make a lump-sum payment toward the principal balance instead of simply adding it onto regular monthly payments (which would mostly go toward interest). This allows you to pay down principal faster and get out of debt sooner than anticipated.

Trade in your car

Consider selling or trading in your car for a lower-priced car. One silver lining is that you may be able to get a higher price if you sell or trade in your used vehicle now. This can help offset the cost of a new car. You will typically get a higher price when you sell it to a private buyer, but it may be easier to trade in your car to a dealer. Do your research to find the best price for your car.

Expand your search parameters

Look at expanding your search parameters. You may have to compromise on your wishlist until the car you want becomes more affordable. You can expand the geographic area you’re searching in, look for a smaller and older car, or target a car with fewer features. You may be able to find a car that meets your needs at a lower price.

Do you really need a car?

Ask yourself if you really need a car. If your family has two cars, can you downgrade to one? Can you take public transportation, carpool, or bike to work? Look at alternative transportation options so you can avoid a car payment altogether. Selling your car can save you money on gas, insurance, maintenance, and other costs, such as annual registration fees.

Keeping up with high car payments every month can be difficult, especially when combined with other expenses like rent and utilities. But by understanding your financing options before buying a vehicle and taking advantage of opportunities like refinancing or making lump-sum payments when possible, you can take control of your debt and save money every month on your car payment.

And remember, this is just the cost of the loan. There are other costs associated with owning a car, like auto insurance, gas, and maintenance. When you’re considering whether to buy a car, be sure to take all these costs into account so you can make an informed decision. With some smart planning and careful budgeting, staying ahead of car payments doesn’t have to feel overwhelming or impossible.

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