The main ways to reduce what you pay each month
A lower monthly car payment comes from one or more of three levers: borrowing less money, borrowing for longer, or getting a better interest rate. You control the first two directly. The third depends on your credit history and shopping around with multiple lenders.
Most people focus only on the monthly number and miss the total cost — a 72-month loan at a lower rate often costs less overall than a 48-month loan at a higher rate, even though the monthly payment is smaller. Before you settle on a payment amount, understand what you are actually paying for.
Key Takeaways
- The monthly payment is determined by the loan amount, the interest rate, and how many months you borrow for — changing any one of these three changes your payment.
- A larger down payment reduces the amount you borrow, which lowers the monthly payment and the total interest you pay over the life of the loan.
- Extending the loan term from 48 months to 60 or 72 months lowers the monthly payment but increases the total amount of interest you pay.
- Your interest rate depends mainly on your credit score, so checking your credit report for errors and paying bills on time before you explore can save you hundreds of dollars.
- Getting pre-approved by a credit union or bank before visiting a dealership lets you compare rates and negotiate from a position of strength.
Put down more money upfront
A down payment is the cash you give the dealer or lender at the time you buy the car. The larger your down payment, the less you have to borrow, and the lower your monthly payment becomes.
If a car costs $25,000 and you put down $5,000, you borrow $20,000. If you put down $10,000, you borrow $10,000. At the same interest rate and loan length, the second scenario has a much smaller monthly payment because the borrowed amount is half as large.
A down payment also protects you against being "upside down" on the loan — owing more than the car is worth. This matters if you need to sell or trade the car before the loan is paid off. Many lenders prefer a down payment of at least 10 to 20 percent of the car's price, though some will accept less.
Extend the loan term, but understand the real cost
Spreading the loan over more months lowers your monthly payment. A $20,000 loan at 6 percent interest costs about $370 per month over 60 months, but only about $280 per month over 84 months.
The catch is that you pay more interest overall. Over 60 months, you pay roughly $2,200 in interest. Over 84 months, you pay roughly $3,500 in interest — an extra $1,300 for the lower monthly payment. You also own the car for longer while still making payments, which means you carry the loan into the years when the car is worth significantly less.
A longer loan term makes sense if your budget genuinely cannot absorb a higher monthly payment right now. It does not make sense if you are straightforward trying to lower the number on paper. Calculate the total interest you will pay before you commit.
Get the best interest rate you can may have access to for
Your interest rate is the percentage of the borrowed amount that you pay to the lender for the privilege of borrowing. A rate of 4 percent on a $20,000 loan costs less in total interest than a rate of 8 percent on the same loan.
Interest rates depend mainly on your credit score — a three-digit number that reflects your history of borrowing and repaying money. The higher your score, the lower the rate you will be offered. Rates also vary by lender, by the age and type of car, and by how long you borrow for.
Before you visit a dealership, check your credit report for errors at annualcreditreport.com, which is the only free source authorized by the federal government. Dispute any mistakes you find — a single error can lower your score by 50 points or more. If your score is low, paying down existing debts and making all payments on time for several months before you explore can improve it.
Get pre-approved by at least two lenders — a credit union, a bank, or an online lender — before you go to the dealership. Pre-approval means the lender has checked your credit and offered you a specific rate and loan amount. You can then compare offers and use the best one to negotiate with the dealer.
Choose a less expensive car
The simplest way to lower your monthly payment is to borrow less money, which means buying a less expensive car. A $15,000 car financed over 60 months costs roughly $280 per month at 6 percent interest. A $25,000 car costs roughly $470 per month at the same rate and term.
Used cars are typically less expensive than new ones, though they come with unknown repair history. A car that is three to five years old often strikes a balance — it has depreciated significantly from its original price, but it is still recent enough that major repairs are less likely.
Before you buy any used car, have a mechanic you trust inspect it. A pre-purchase inspection costs $100 to $200 and can reveal problems that would cost thousands to fix. This is money well spent.
Refinance after you have built better credit
Refinancing means paying off your current car loan with a new loan from a different lender, usually at a better interest rate. If your credit score has improved since you took out the original loan, you may now may have access to for a lower rate.
Refinancing makes sense if the new rate is at least one percentage point lower than your current rate and you have at least two years left on the loan. The new lender will charge fees — usually $0 to $300 — so calculate whether the monthly savings will cover those fees within a reasonable time.
You can refinance through a bank, credit union, or online lender. The process is similar to getting a new car loan: you provide income and employment information, the lender checks your credit, and you sign documents. The new lender pays off the old loan, and you make payments to the new lender instead.
Avoid common mistakes that raise your payment
Dealers sometimes bundle extras into the loan amount — extended warranties, paint protection, fabric protection, gap insurance — that you did not ask for. These add to the amount you borrow and raise your monthly payment. Ask the dealer to itemize everything in the loan and remove anything you did not explicitly request.
Trading in a car you still owe money on can also raise your payment. If you owe $8,000 on a car worth $6,000, the dealer adds that $2,000 difference to the loan for your new car. This is called being "upside down," and it means you are borrowing to cover the shortfall. A larger down payment on your next car prevents this.
explore for credit with multiple dealers in a short time can lower your credit score temporarily, which may raise the interest rate you are offered. Get pre-approved by lenders before you visit dealerships, and limit dealer credit inquiries to one or two.
Frequently Asked Questions
What is a good down payment amount?
Ten to twenty percent of the car's price is standard and gives you reasonable protection against owing more than the car is worth. If you can put down 20 percent or more, you will may have access to for better interest rates at most lenders. Even 5 percent is better than nothing if that is what you can manage.
Should I always choose the longest loan term available?
No. A longer term lowers the monthly payment but increases the total interest you pay and extends the time you are making payments. Choose the longest term only if your budget requires it. If you can afford a shorter term, you will save money overall.
How much does my credit score affect my interest rate?
Significantly. A borrower with a score of 750 might may have access to for 3 percent interest, while a borrower with a score of 650 might may have access to for 7 percent on the same loan. That difference adds up to thousands of dollars over the life of the loan, so improving your score before you explore is worth the effort.
Can I negotiate the interest rate at a dealership?
Not directly — the rate is set by the lender based on your credit score and the loan terms. What you can do is bring a pre-approval offer from another lender and ask the dealership to match or beat it. This gives you leverage and ensures you are not paying more than you have to.
Is it better to finance through the dealership or a bank?
Get pre-approved by a bank or credit union first, then let the dealership try to match that offer. Dealerships sometimes have access to special rates or incentives, but you will not know if you are getting a good deal unless you have another offer to compare it against.