Car payments are starting to resemble rent and mortgage payments, thanks to high interest rates and inflation. According to data from Edmunds, 17.4% of new vehicle car loans in the third quarter of 2024 had monthly payments of $1,000 or more. 

"Q3 was unfortunately the same old story as the first half of 2024 in terms of auto financing conditions: Car shoppers found little relief from the elevated interest rates and high prices, which in turn hindered new-vehicle sales growth," said Jessica Caldwell, Edmunds' head of insights, in a press release. "The Fed's decision to cut rates was a welcome update at the end of the quarter but, on its own, is unlikely to dramatically change the financial landscape for car buyers."

If that’s your situation, you have options. Refinancing is a common way to lower your car payment by getting a better interest rate or lengthening your repayment terms. Additionally, putting your nest egg into a high-yield savings account can earn interest (the good kind) that you can put toward your monthly car payment.

Refinancing Your Car Loan Could Save You $200+

Refinancing your car loan can lower your monthly payment by lowering your interest rate, extending the length of your loan term, or both.

For example, let’s say you bought a car for $50,000 earlier this year. You put $0 down, and locked in a 60-month loan with an 8.00% interest rate (APR). That would make your monthly payment $1,014. After making payments for 10 months, you decide to refinance which lowers your payment in two primary ways:

• A lower interest rate reduces your monthly payment: After 10 months, you have $42,680 left on your loan. You decide to refinance to a 7.00% rate with a new 60-month loan, which makes your new monthly payment $845. That’s a savings of $169 per month.
• Lengthen your repayment term: After making 10 months of payments, you would have 50 months remaining on your original loan. But if you refinanced and secured another 60-month loan—even with the same 8.00% interest rate—your monthly payment would go down by $149. It may feel like a setback to essentially “start over” on the loan term, but 10 additional months can be worth it for the extra room in your monthly budget. Just know that increasing your loan term also increases the total amount of interest you’ll pay over time.

Refinancing works best when car loan interest rates have fallen since you purchased your car. Though the Federal Reserve cut rates at its September meeting, the cost of borrowing is still high. Rates are expected to fall over the coming months and years, so it may make sense to hold off on refinancing to get the best deal. You might wonder why not refinance more than once—now, and then again as rates continue to fall. That’s an option, but there are tradeoffs.

“Consumers are encouraged to compare auto loan options as rates fluctuate frequently,” said Melissa Caro CFP, Founder of My Retirement Network. “However, it’s essential to consider any fees associated with refinancing and whether the savings outweigh these costs.”

Another reason you might want to refinance is if your credit score has increased. Maybe you didn’t have the best credit history when you got your car loan, but your credit score has improved after several months of on-time payments. With a better credit score, you may qualify for a lower APR. 

If your credit score hasn’t improved and interest rates haven’t fallen since getting your loan, your best bet for reducing your bill with a refinance may be extending the length of your loan. 

Offset Your Interest Payment With Other Interest

There’s a silver lining to high interest rates: They apply to savings account balances, too. When it’s most expensive to get a car loan because of high interest rates, it’s also the best time to keep money in a high-yield savings account. Earning interest on your savings while paying down your car loan could mean the ability to make one additional car loan payment per year.

High-yield savings accounts put your money to work for you, earning interest while you do nothing. Let’s say you have $20,000 in a checking account. Moving that money to a high-yield savings account with a 5.00% APY (compounded monthly) would earn you $83 in interest in one month and $1,023 over one year (without any additional contributions). You could use that annual interest to make one extra car loan payment per year, reducing your loan term and paying less in interest.

Keep in mind that your savings account’s APY will fluctuate with the Federal Reserve’s interest rates. Knowing that rates are expected to drop in the coming months and years, you can’t count on earning that level of interest indefinitely. If you want to lock in a high APY, look into another type of account, such as a certificate of deposit (CD). 

Just remember that any interest you earn in a high-yield bank account is subject to taxes.

“It's important to note that interest earned in an HYSA is taxable,” Caro said. “Therefore, if you're in a higher tax bracket, the effective yield after taxes might be lower than expected.”

Still, rates are currently high, and having money in a high-yield savings account will always be more lucrative than keeping it in a non-interest-bearing account.

Just because you agreed to specific auto loan terms doesn’t mean you’re stuck with a sky-high monthly car payment forever. Refinancing can significantly lower your monthly payment if you can secure a lower interest rate or a longer loan term. Additionally, take advantage of low-effort savings opportunities like high-yield savings accounts that can earn interest you can put toward your auto loan.