Sunday, June 10, 2012

High Car Payments? 3 Options to Consider

Dealing with high car payments is something that many people are faced with every single month. While buying the more expensive car might have seemed like a good idea at the time, later, you may wish that you had not. If you are saddled with high car payments that you can not afford, here are a few options to consider.

1. Refinancing
One option that you have is to refinance your auto loan. This will only work if you have been paying on your car for a few years or if you can find a loan with lower interest. Most car loans are set up to be around 5 to 6 years. For example, let's say that you bought a new car for $15,000 and financed it for 5 years. After 3 years of payments, your balance would be down to $7000. Your original payment was amortized based on taking the $15,000 balance, adding interest and dividing it by 60 months. Therefore, you are still making that payment, even though your balance is only $7000. By refinancing, you can take that $7000 and spread it out over a new auto loan for 5 years. Now you are taking $7000, adding interest, and then dividing it by 60 months. This will significantly lower your payment, but you need to realize that you are going to be paying on the car for another 5 years. 
If you find a car loan with a lower interest rate than what you are paying, it could also have the effect of lowering your monthly payment. However, this will usually not be as drastic of a payment reduction unless you have already paid down some of the balance of the loan.
2. Trade In
Another option that you have is to trade in your existing car to a car dealership. In order to lower the monthly payment, you will most likely have to choose a car that is not as nice as your existing car. By choosing a car that is valued much lower than what you are currently driving, the new car payment could be lowered a bit. When you choose this option, you need to investigate the process very carefully. If you are not cautious, you could be taken advantage of by the dealership. They are notorious for not giving you fair value on your trade in and adding in unnecessary fees along the way.
3. Sell Your Car
Instead of trading your car in to the dealership, you could also try selling it to a private party. With this option, you will most likely have to advertise that your car is for sale and then find your own buyer for the car. You can then take the money that you net from the sale and try to buy an inexpensive car with it. With this method, it could take longer as you have to locate a buyer before anything can be done. 
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