According to the latest numbers from the American Automotive Association (AAA), the average yearly cost of owning a new vehicle hit $10,728 in 2022, an increase of over $1,000 a year compared to 2021.
As your vehicle costs start to eat up an even larger portion of your monthly budget, here are a few steps you can take to get a handle on your car payments before you fall behind.
Work with your lender
No matter where you get your loans, work with your lender as soon as you think you might fall behind on your payments.
One effective strategy is to change your due date to sync up with your job’s pay schedule. This can help ensure you don’t end up with missed payment or overdraft fees.
Be sure to ask as well whether your lender will let you defer or skip a payment, a practice that became common during the COVID-19 pandemic.
Lenders can’t work with you if you don’t make your needs plain. They can help develop a plan that works with your budget; keep in mind that your continued business beats any loan default.
It could help lower your stress level to seek them out before you get in trouble, though a sudden job loss or financial emergency could just as likely encourage them to work with you.
Refinance your loan
If you are having trouble keeping up with your debt, ask yourself: Can you find another loan at a lower interest rate? It’s a key question to consider, because higher interest rates mean less money paying off the loan principal.
Let’s compare two 60 month car loans for $25,000 and roughly $7,000 paid up front. At 10% interest, you will pay $5,500 in interest – but at 6%, that number shrinks to $3,200.
Remember: Lenders want your business. If you show upfront that you’ve done your homework, they’ll be better motivated to give you the best rate possible.
Even your existing lender could drop their rate if you let them know you’re shopping around.
Keep in mind, there may be fees associated with switching lenders or refinancing your loan.
Read more: Millions of Americans are in massive debt in the face of rising rates. This free service could help you save hundreds on interest payments
Consider a cheaper new or used car
New cars are infamously poor investments; their value drops the second you drive off the dealership lot.
But if you bought an expensive new car and it’s just a few years old, now might be an ideal time to trade down for a cheaper car.
The entry-level models of certain brands such as Toyota and Honda have well-earned reputations for longevity and relative ease of repair. Trading down from infamously expensive-to-maintain brands – BMW, Mercedes and Cadillac top one list – will save you money on two fronts: maintenance and the size of your loan payment.
When considering whether you should make this move, ask yourself a few important questions.
Can you get a model with better gas mileage? Can you shop around for cheaper insurance? Can you take public transportation or bike more often?
Take it from personal finance expert Suze Orman, who wrote last month about the most important factors to consider if you are in the market for a car.
“Your goal should be to buy the least expensive car. Period. That should steer you to a used car rather than a new car,” she wrote.
“I can’t stress enough the importance of spending the minimum you need to get a reliable car. Please do not pay up for bells and whistles.”
Essentially, be realistic. Whatever option you choose, don’t fall seriously behind with your bills for the sake of a car that is out of your price range.
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