Owning a vehicle in this day and age can be extremely expensive. There are the obvious expenses that go beyond the purchase price, like filling up the tank, car insurance and general maintenance costs. And that doesn't even cover the inevitable repair cost that comes when you least expect it.
Yet, these additional costs don't even come close to the monthly payments you'll be making just to keep the car in your name and experience the thrill of car ownership.
The problem is, you're going to be stuck with these monthly payments until you can finish paying off your car. So, finding every possible saving is extremely important when money is tight.
Let's go over everything you need to know about cutting your monthly car costs so you can have a little more cash in your wallet.
Car Expenses to be Prepared For
You've probably heard the saying, "Failing to prepare is preparing to fail." And there is some truth in that when it comes to your budget. Before we go into how to lower your car costs, let's chart out some of the expenses that will be coming your way with your new car purchase so you don't have any unfortunate surprises later on.
Most states legally mandate that drivers carry some form of auto insurance, so get prepared to shell out some cash that way. Insurance premiums are based on your driving record and the type of coverage your lender requires if you have a car loan.
License & Registration Fees
License and registration fees usually only shock a new car owner, but if you have recently moved to a new state, you will want to look at the total cost for appeasing the DMV before driving off the lot. Nothing is worse than having to create a savings account to get your car road-ready after a purchase.
Like everything else in this world, your car will live longer if you take good care of it. Regular oil changes and tune-ups are worth their weight in gold and will save you some serious bucks in the long run. So make sure you have enough in your budget for these small but mighty jobs.
If you have a new car, budgeting for an extended warranty may help cover some of these costs.
Gas prices are no laughing matter, and depending on your commute and type of vehicle, you could be spending a pretty penny in this area each month. So pay attention to your new car's fuel economy and budget accordingly.
Repairs come in two forms: normal wear-and-tear breakdowns and the unfortunate collision.
No matter how many regular oil changes or tire rotations you schedule, your car will experience a breakdown at some point. It's just inevitable. Save yourself the heartache later on by preparing a savings account for repairs from the start.
That savings account will also come in handy if you get into a fender bender and need to cover your insurance deductible. And if your insurance policy doesn't cover towing, you should plan on AAA.
Average Monthly Car Costs
You will find out a lot about the car you want at the dealership. But what you don't find out is what others are paying for the same vehicle. You might feel like you're getting a great deal at the time, only to find out that you're severely overpaying on car payments.
So, what is the average cost of a new car in the United States?
According to Experian, a brand new car averages out to about $544 a month, which will cost you an average of $6,528 over the course of a year. On the other hand, a cheaper used car might be closer to about $391 a month, which is an annual cost of about $4,692.
Luckily, websites like Kelley Blue Book can give you a pretty accurate pricing reference for your new car to help you make the best decision.
However, regardless of the type of car you decide on, you're spending a lot of money on a monthly car payment. That's just less money you can spend on the important things, like the electricity bill or your rent payments.
And, it doesn't make much sense to spend that much money every month on a car if you don't drive a lot. You'll be disappointed to know that a lot of your hard-earned cash is going down the drain on your car payments.
Buy a Used (or Cheaper) Car Instead
The problem with brand new cars is depreciation costs. What they say is true - your car loses value as soon as you drive it off the lot. The average car loses 20-30% of its value in the first year and continues from there.
So, you might end up paying more than what your car is truly worth. When you buy a used car instead, the car has already depreciated significantly and has the resale value to match. That means you're definitely getting more value for your money without having to risk quality at the same time. Any future depreciation won't cause financial ruin.
Let's say you're buying a brand new vehicle that's valued at $30,000.
You get a 60-month loan with a rather low 3.11% interest rate. This will cost you an incredibly high $541 a month and doesn't even account for sales tax or finance charges that come with a new car loan.
Now, let's say you decide upon buying a cheaper or a used car valued at only $20,000. With the same loan terms and interest rate, you'll only be spending about $360 a month.
See how much of a difference the car's value makes?
As much as you might love having a brand new car that nobody has ever driven, consider how important that is when it comes to an extra few hundred a month in car payments.
Work on Raising Your Credit Score
If you have a low credit score, even locking down an auto loan might be a feat in itself. At the same time, a higher credit score will play a huge role in deciding the interest rate you can get on a loan.
But, just how big of a role does your credit score play?
According to Credit Karma, having a credit score that's below 660 will make it more difficult to qualify for a loan in the first place. In terms of interest rate, you might be looking at up to 14.41%. That's insanely high, especially if you're not financially well-off.
On the other hand, a credit score over 660 might secure you an interest rate of up to 4.56% on an auto loan. Compared to over 14%, that's a massive difference and will seriously impact your monthly payments.
Yet, let's translate this over to actual dollar amounts so you can see what we're talking about.
Let's say you're buying a car that's worth $20,000.
If your credit score is well below 660, creditors are going to be less willing to even offer you a loan at all. A 14.41% interest rate will bump your monthly payments up to about $470 a month if they do.
On the other hand, a credit score above 660 makes your loan incredibly appealing to financial institutions. On that same $20,000 car, you might get a loan with an interest rate of up to 4.56% instead, which drops your payments down to $373 a month.
Over the course of your loan, this can save you close to $6,000 or close to $100 a month.
So, how do you go about raising your credit score to make this a reality? Here's what you can do.
- Pay off your current loans and credit card bills.
- Lower the amount of money you spend on your credit card (keep those bills low!).
- Work on paying all of your bills on time.
It will take a while to raise your scores. But, it'll be worth it when it comes to saving thousands of dollars over the course of a few years.
Look at Your Loan
Refinancing your loan can be a little tricky, but it'll save you a lot of money in the long run.
But, what does it really mean to actually refinance your loan?
When you refinance a loan, it means that you're paying off your current loan with a brand new loan. In most instances, this brand new loan has a lower interest rate than your initial loan, especially if you've been working on your credit. That's where you'll be saving your money over the terms of your loan.
But refinancing isn't always the best option. You'll only want to refinance your loan if you can secure a much lower interest rate than what you're currently paying.
You can also extend the terms of your loan.
Let's say you have a loan with $15,000 left to be paid and 60 months remaining on your loan. Averaging that out, you're spending about $250 a month on this same loan.
If you were to extend this loan to 72 months instead, you'd be paying a good portion less per month. Your monthly payment would be dropped down to about $208 a month in this case by simply adding 12 months to your loan.
No matter why you're doing it, refinancing or adjusting your loan is a great way to pay off your car sooner or leave you with more cash in your pocket at the end of the month.
Lease a Car Instead of Buying a Car
There's just something about owning a new car that people love.
At the same time, buying a car can be very expensive and leave you with high monthly payments for five or more years. That might not be something you can commit to in your current financial situation.
Leasing a car usually comes with lower payments and only lasts about three years.
According to Edmunds, there are a lot more costs that come with buying a car (instead of leasing). In fact, leasing might be able to save you over $3,000 over the course of your ownership, on average, in out-of-pocket costs.
Leasing also guarantees lower costs when it comes to repairs. Since most parts are within warranty still, you don't have to worry about spending your own hard-earned money to replace the engine or transmission that suddenly failed.
That's especially the case since some car parts like engines can cost you well over $4,000.
But, you want to be careful about how you interpret this data. Yes, leasing definitely saves you money right now. In the long-term, it might not be the best solution.
That's because you need to consider the equity you get when buying.
When the lease ends, you give back your car to the dealership with nothing to show for. Buying a car tends to be more expensive, but you can sell the car after it's paid off and get some money back in your pocket.
Leasing saves you money right now but doesn't make the best long-term solution.
Bump Up Your Down Payment
This solution won't be for everyone. But, it will work if you have some extra cash lying around.
The quickest way to guarantee low monthly payments is by putting a lot more money down at signing. The more cash you put down upfront, the lower your payments will be.
In most cases, putting about 20% down is a great way to guarantee affordable monthly payments.
But, just how much of a difference does this make?
Let's say you're buying a $20,000 car from the dealership.
If you put $2,000 down, you'll be getting a loan for $18,000 to pay off over the next 60 months. Without extra fees or interest tacked on, your current monthly payment will be about $300 a month.
Now, let's say you put down a little more at signing, say $4,000. Now your loan is for $16,000. Over the same terms and without including taxes, fees, and interest rates, your payment is suddenly down to about $267 a month.
That extra money can be used to pay your bills.
Trade-In Your Current Car
Buying a car might seem impossible if you don't have money on hand.
You might feel like you only have two options here:
- Buy a car for $0 down and pay enormous monthly payments during the terms of your loan.
- Settle for an extremely cheap car that might be out of warranty and break down within the year.
There's actually another solution that makes more sense: Trading in your current car.
This requires you to trade your car into the dealership you're buying from (keep that in mind).
The dealership will then consider the value of your car and add this value to your down payment.
Even an extra few thousand dollars can make a dent in your future car payments.
There are also other benefits of doing this too.
Aside from covering the taxes, fees and down payment, trading in your car makes your life a heck of a lot easier. You don't have to stress about selling your vehicle on your own and that awkward gap of time between selling your old car and buying a new one.
Not to mention how difficult it tends to be to sell a car in 2020.
You can actually trade your car in and walk out with a new car on the very same day.
You might have a car dealership in mind that's known for having really good deals and a great showroom. But, simply settling for the first car dealership you can find is about as silly as buying a product on Amazon without reading reviews.
Every car dealership is run in its own way.
You might be able to save a good few thousand dollars on the same exact car at a dealership just down the road. Other dealerships might also offer unique deals and promotions.
Take a good look at your local dealerships to find out if they're offering any promotions or deals in the coming weeks.
Secure yourself a good deal now to lower your payments in the future.
What's the Best Way to Reduce Your Monthly Car Costs?
Here are some useful tips for cutting your monthly car costs:
- Buy a used or a cheaper car instead
- Raise your credit score to get lower interest rates on loans
- Refinance or extend the terms of your loan
- Lease instead of buy
- Spend more money on the down payment
- Trade-in your current car
- Shop around for a good deal
While all of these methods might not be possible for you, you should try to see what you can actually do about cutting your payments down. Every little bit counts.
You might also be interested in: 5 Ways to Reduce Your Monthly Housing Costs