Buying a car is a big financial commitment. And if you accomplished this dream using an auto loan, chances are you made that decision fully aware that the road ahead might have a few bumps as life is unpredictable.
Now that life has thrown its curveballs, what was once a manageable monthly car payment might now feel like a thorn in your side. Perhaps the rising interest rates have crept up on you, leading to increased monthly repayments. Or it is a sudden decrease in income due to unforeseen circumstances like salary cuts.
Regardless of the cause, the bottom line is clear: those car payments might be straining your finances or threatening your stability, and you need to lower them to avoid default and possibly repossession. If you are wondering how you can do that, you are at the right place.
This article will explore six strategies you can use to lower your auto loan repayments to get your debt under control and alleviate any burden it might be causing.
When you refinance your car loan, you essentially replace your current loan with a new one. You can refinance with your current lender or seek a different lender.
When you initially took out your auto loan, the interest rate might have been higher, resulting in larger monthly payments. But now, your credit score has improved, you have more equity in your car, or you found a lender offering a lower rate than your current one.
By refinancing your car loan now, you can secure a new one with a lower interest rate that can help you reduce your monthly auto loan payments and potentially save you money in the long run.
To determine whether refinancing for a lower interest rate is right for you, research and compare auto lenders to find the one offering the most favorable terms. Shop around for the best interest rates and loan terms, taking into account factors like your credit score and overall financial situation. You can use Money254's free tools to find a new auto lender matching your needs.
When refinancing your auto loan to lower the interest, consider doing a cost analysis to ensure you save money. This strategy often involves paying new costs, including prepayment penalties, new loan application fees, and vehicle appraisal fees that can all add up to hurt your bottom line.
Refinancing your car loan for a longer term is an alternative strategy that can help lower your monthly auto loan payments, making it more manageable for your budget.
It involves extending the term of your auto loan from, for example, 12 months to 24 months. This move can provide short-term relief when you struggle to meet your car payment obligations.
There are crucial considerations to keep in mind if you choose this option. While longer loan terms result in lower monthly payments, they may also mean you'll pay more in interest over the life of the loan, potentially increasing the total cost of your loan.
If you have already missed multiple car payments or your credit score has dipped, refinancing for a longer term might be more challenging and expensive.
Read Also: How to Avoid Regret After Taking Out a Loan
Don’t wait until you cannot make your monthly payment and default on your car loan. Get in touch with your lender to negotiate a new plan while you still have time.
When facing financial difficulties that make your monthly auto loan payments a burden, renegotiating your car loan terms can provide much-needed relief. To initiate this process, you'll want to contact your lender and explain your situation. You can write them a hardship letter or set up a meeting with them.
This can allow you to express your financial struggles, outline the reasons behind your current predicament, and what you are doing to get back on track. To make a compelling case, it's essential to be honest and specific about your challenges plus solutions.
Following a successful renegotiation, lenders may be open to modifying your loan through refinancing or offering a short-term payment plan, allowing you to defer payments for a few months and alleviate immediate financial pressure.
During the negotiations, emphasise on a mutually beneficial solution that can help you maintain a positive credit history while saving the lender from costly and time-consuming repossession processes.
If you have maintained a clean payment record and haven't missed any payments, you can leverage that to get the upper hand during the renegotiations.
Finally, renegotiations don't have to be with your current lender only. You can explore other options that allow you to change your lender. For example, you can consider debt consolidation and loan buyoff. The new lenders might offer new terms to make your monthly repayments more affordable.
One effective strategy for reducing your monthly auto loan payments is to sell your current car and buy a more affordable one. This is a swift approach, especially if your existing car loan has become too burdensome and the risk of default and repossession is looming.
When you sell your car on your own, you can sell it for its market value. On the other hand, if you were to default, the lender might repossess the vehicle and auction it off, often resulting in a lower sale price. This situation can leave you without a car and still owing the lender money.
You control the process by taking the initiative to sell your car. If you can secure a favorable sale price, you can repay your outstanding debt and use leftover funds for a down payment on a less expensive vehicle. This, in turn, can lead to more manageable monthly repayments on your new car.
Selling a car with an outstanding loan, with a lien, can be more complex. Therefore, you should inform your lender of your intention to sell privately and be transparent with potential buyers.
If selling your car privately isn't a convenient option, and you don't have enough time to find a buyer, you can still lower your monthly auto loan payments by considering a trade-in. This involves returning your current car to the lender and exchanging it for a less expensive used car.
While you won't completely eliminate your car loan, this approach can reduce your outstanding balance and potentially result in lower monthly repayments. For it to work, your lender should offer this option or allow you to find a third party, such as a car dealership that accepts trade-ins.
You can think of it this way: The lender (or a dealership) will essentially buy your current car from you and then sell you a new one that's more affordable and has lower monthly repayments.
Let's say you have a 2018 Prado with an outstanding debt of Ksh1,500,000. If you are struggling with the high monthly payments, you can trade it in and downgrade to a 2015 Toyota Fielder worth Ksh1,000,000.
The lender (or the dealership) will buy your Prado for, say, Ksh2,200,000. They'll deduct the Ksh1,500,000 you owe and any other costs, and let's say you will remain with Ksh500,000. This Ksh500,000 will go toward the down payment of your 2015 Toyota Fielder, and you will have a loan balance of Ksh500,000.
While the primary focus of paying extra is to reduce overall costs and pay off the loan faster, it can indirectly lead to lower monthly payments. This approach can provide flexibility in the future when you have hit a roadblock and are struggling to make payments. When you've made substantial extra payments and reduced the principal balance, you can refinance the remaining amount into a new loan with reduced monthly repayments.
Before implementing this strategy, you should consult with your lender to understand their policies regarding extra payments. Some lenders may have specific procedures or limitations on how you can make extra payments.
Circumstances can change, and you can find yourself unable to service your auto loan. When this happens, contact your lender ASAP! Depending on your repayment history, credit score, and outstanding balance, the lender could be willing to alter your loan terms and work with you to avoid default and repossession.
Remember that reducing the monthly repayment is only treating the symptoms. For long-term success, you need to treat the cause and make your car loan affordable. This can include reducing your overall debts, increasing your income, and staying clear of loans you can't afford.