How to Lower Car Loan Payments

There are so many reasons why you would want to lower your car finance payments. It could be because you're struggling to cope with your spendings, in the face of the rising costs of living. You're not alone – many people around the UK have been facing difficulties when it comes to keeping up with loan payments.

Is it possible to reduce monthly car loan payments after the start of your agreement though? How can you get low monthly payment car loans? We're going to be exploring all about lowering car finance spendings including low interest used car loans and the best tips for smart car finance. 

The Different Types of Car Finance

There are essentially three different car finance options you can choose from when getting a car loan in the UK. You can take your pick between Personal Contract Purchase (PCP), Hire Purchase (HP) or a personal loan. But what is the difference between the different types of car finance and which is best for your circumstances? 

Personal Contract Purchase (PCP)

When you enter into a personal contract purchase agreement, you'll have to first pay a deposit which will usually be around 10% of the car's value. You'll then need to make a predetermined number of monthly repayments and you won't own the car until you've paid off every penny.

How much you will pay every month will depend on how expensive your car is, what your loan interest rate (APR) is and how much value your car will lose over the course of your contract. That is called depreciation and it's a big part of car finance. 

At the end of your agreement, once you've made all your monthly repayments, you have a few options. The first choice is to return the car with no extra cost, or pay what is called a “balloon payment” if you're looking to own the car now that it's paid off. 

The amount of your balloon payment will vary according to different factors, but it will always be specified in your contract at the start of your loan.  That's why we always say it's really important to read the fine print before you commit to any type of finance. Also check the conditions for mileage and undue wear and tear - which could cost you extra!

Hire Purchase (HP)

Hire purchase agreements are considered to be the most straightforward of all car finance deals. What happens is that you usually pay a deposit which again is around 10% of your car's value. Then, you pay off the full cost of your car, plus interest, in fixed monthly instalments, which usually last anywhere between 1 and 5 years. The longer the loan term the more you'll end up paying in loan costs so do be careful that you don't spread yourself too thinly when you set your budget. 

Once you've paid off all of your monthly instalments you'll have the option to pay what is called an “option fee” or “transfer fee” if you’d like to take ownership of the car. You won't own the car until that payment is made though, but you will find that it's quite affordable. Be careful that you don't make any arrangements to sell your car before you officially own it and have paid the fee. 

Personal loan

I’m sure you’re well acquainted with personal loans as we've all had to encounter them at some point in our lives. Taking out a personal loan involves borrowing a fixed amount of money and then repaying it in monthly instalments with interest. You'll find that most personal loans vary from being 1 to 7 years long.

You'll be able to access vastly different interest rates depending on how much you're borrowing and how good your credit score is. You will find that you'll often get a lower API the higher your loan is. That means that small amounts will usually cost you more interest.

Fun fact: using a personal loan to purchase a car, used or new,  effectively makes you a cash buyer!  That's because you're not relying on any car finance provider to go ahead with the purchase. So you would be in a good position to haggle the price!

How To Lower Car Loan Payments

However you choose to purchase your car, fluctuations in budget and financial circumstances can happen very easily. That means that you might have to change your monthly instalments after the start of your car finance agreement. Looking for low APR car loans UK but don’t know how to find them? Let’s explore. 

What to Look Out For

Our first piece of advice when considering how to lower your car loan payments is to go for a fixed-interest loan. These types of loans will generally make for less expensive monthly payment amounts and you won't encounter any unexpected hike in your monthly repayments. 

The next thing to consider is a low interest rate. Lower interest rates will guarantee lower monthly payments. Look for the term APR  when enquiring about interest rates – it stands for annual percentage rate and it can tell you how much you will be paying in interest per year, in other words the real cost of car finance. All lenders calculate this in the same way so it's a good comparison tool. You may notice that these rates are often advertised as representative: that means that what you see is not a guarantee. You may end up having to pay more or sometimes less, depending on your credit history. It's always a good idea to triple-check what you're signing before you approve it, because things may have changed.

Refinance Your Car

Depending on your car finance agreement, you may be able to refinance your loan in order to obtain a lower interest rate, or spread out your agreement over a longer loan term. This could shave a good chunk off your monthly payments and is something to consider - especially if you are currently paying high interest rates and either these have generally gone down or you can now get a better rate as your credit score has improved. You can also sometimes choose to extend the new loan - depending on the age of your car. 

However, do bear in mind that making your car loan longer will only add to your interest rate, therefore making it more expensive in the long run. Our advice is to try to have the shortest loan term possible, whilst still taking into consideration your budget.

Part-Exchange Your Car for a Cheaper One

If you desperately need to cut down your monthly car loan payments you could consider part-exchanging your car for a cheaper one. You'll have to pay a settlement fee to your lender though, and it will take quite a bit of research to compare different valuation quotes from car retailers. If your car is worth more than the settlement fee you'll be able to sell it. If it is not you'll have to make up the difference in order to sell your car. 

The Bottom Line

You can also consider using Carmoola to stay in control of your monthly loan payments. ​​Carmoola provides a simple and straightforward approach to obtaining car finance, putting you in charge. Use our calculator to see how much you may spend each month if you finance your next vehicle with Carmoola. And if you're looking to reduce your costs, Carmoola has some great refinancing deals too! 😊