How to Lower Your Car Payment

Quick Answer

Among the options for getting a low car payment are improving your credit score, making a larger down payment, buying a less expensive car or refinancing your auto loan.

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In the third quarter of 2022, the average balance on a car loan stood at $22,612, up 7.7% from the same time a year earlier, according to Experian data. It would make sense, then, that a borrower with an auto loan would want to lower their car payment.

Fortunately, borrowers enjoy a number of options for reducing their car payments. Among the ways you can get a lower car payment are comparing different loans, making a bigger down payment and choosing a less expensive car.

1. Improve Your Credit Score

Before applying for a loan, check your credit score. If your score isn't where you'd like it to be, see what you can do to boost it. The higher your score is, the lower the annual percentage rate (APR) and monthly payments likely will be.

Let's say you're considering a $30,000 auto loan with a 60-month term on a new car. Using average interest rates from Experian's June 2023 State of the Automotive Finance Market Report, you can see how your credit score could make a significant difference in your loan payments. If, for example, your credit score is on the lower side at 550, you could have an APR of 14.1% and a monthly payment of $669.60. But if your credit score is 820, you might enjoy an APR of 5.18% and a monthly payment of $568.61. That's a difference of over $100 a month and more than $6,000 over the term of your loan.

2. Compare Car Loans

To get the best deal on an auto loan, compare offers from several lenders. Among the factors to consider when comparing offers are:

  • Look at the interest rate. The interest rate, shown as a percentage like 5%, is the cost of borrowing money. It excludes fees charged by the lender.
  • Check out the APR. Also expressed as a percentage, the APR combines the interest rate and fees to provide a clearer idea of how much you're paying to borrow money. A higher interest rate and APR typically result in a higher monthly car payment.
  • Estimate the monthly payment. Once you've nailed down the interest rate, APR and length of a car loan, you can calculate what the monthly payment would be.

3. Pick a Longer Loan Term

A longer loan term, such as 72 months versus 60 months, can reduce your monthly car payment. Most car loans offer terms in 12-month increments. The most common term for a car loan is 72 months (six years). The longest available term is 96 months (eight years).

Keep in mind that the longer your loan term is, the more value your car will likely lose as the years go by. In other words, you may wind up owing more on the loan than the car is worth. Furthermore, while your monthly car payments may go down with a longer loan period, you may pay more in the long run in terms of interest and fees.

4. Make a Bigger Down Payment

A bigger down payment typically means borrowing less money to buy a new car and, therefore, can lower your monthly loan payments. It's recommended that your down payment be at least 20% of the purchase price for a new car and at least 10% for a used car.

If you can wait a bit to buy a new car, taking the extra time to save up for a bigger down payment can really pay off in the long run with lower monthly payments.

5. Choose a Less Expensive Car

If you pick a less expensive car, you should be able to reduce the monthly amount you'll pay on your auto loan.

Let's say you've got your heart set on a full-size luxury SUV priced around $80,000 but the monthly payments would stretch your budget too thin. If you opt, instead, for a small luxury SUV with a price tag of around $35,000, your monthly payment would be considerably lower if everything else is equal. In this scenario, you'd still get a taste of luxury without breaking the bank.

6. Buy a Used Car

You might be able to save thousands of dollars—and, therefore, lower your monthly payment—if you purchase a used car rather than a new car.

Experian data shows the average loan for a new car was $41,665 in the third quarter of 2022, compared with $28,506 for a used car. During the same period, the average monthly payment was $700 for a new car and $525 for a used car—a monthly gap of $175, or $2,100 per year.

7. Lease a Car

Leasing a car generally leads to monthly payments that are lower than they are for an auto loan.

Why? When you take out an auto loan, you're paying interest, and you'll own the car once the loan is paid off. But with an auto lease, you aren't paying interest, and you won't end up owning the car once the lease ends. The lease payments essentially cover the amount that the car's value will go down during the lease period.

One big drawback to leasing: You will have made monthly payments, but you won't own a car that you can sell or trade in.

8. Refinance Your Car Loan

Let's say you've had a car loan for two years and your credit score has shot up during that time. In this scenario, refinancing your car loan at a lower interest rate—a rate you might have been unable to snag with a lower credit score—may reduce your monthly payment.

Refinancing involves getting a new loan and using the proceeds to pay off your current loan, ideally with a lower interest rate and monthly payment.

The Bottom Line

You can take a number of steps to get a low car payment—from improving your credit score or making a larger down payment to buying a less expensive car or refinancing your loan. To work on boosting your credit score, regularly review your credit score and credit report from Experian. See what factors may be causing you issues and work to improve them in the hopes of securing better borrowing terms in the future.