I bought a new car at 17 percent interest. How can I reduce my payment?

Dear Penny,

I bought a brand new Kia Soul in 2018. I feel very stuck because my credit was not the best at the time. Now my car payment is so high. It’s $ 450 per month because of my interest rate of over 17%.

I even tried to trade it, but now I really can’t anymore because my credit rating is too low. Do you have any ideas?

-Stuck at 17%

Dear stuck,

You probably don’t have good options right now because you most likely have negative equity in your car. This means that you owe more than it is worth.

It’s pretty normal to start with negative equity when buying a new car if you don’t make a lot of down payment. You know that phrase about how a new car loses 20% of its value the moment you leave it? Well, actually that 20% drop happens more in the first 12 months you have the car, but you see the picture: new cars lose value quickly.

Normally the negative equity situation is short lived because you can start reducing the equity balance. But you pay 17% interest. You don’t need me to tell you, but it’s really very high. High interest rates mean you spend a lot more time underwater in a loan, and while you’re underwater, your options for getting out of that car loan will get worse and worse.

You are unlikely to be able to refinance, especially with bad credit. And your downsizing options at the dealership would likely turn your existing balance into a car loan. This may or may not reduce your payments, but it would push you into more debt and prolong the pain.

You’re not going to like the advice I’m about to give you, but listen carefully: your best solution is to make that oh-so-painful monthly payment of $ 450, then pay some more and more.

You have a relatively new vehicle. Could you use that soul to earn an extra $ 50 or $ 75 per week with a side activity, like driving for a rideshare app or going shopping, and invest every dollar you earn in that loan?

If you’ve owned your car for about two years, there’s a good chance that at least half of your payments are still going to interest. Putting an additional $ 200 or $ 300 per month in your car payments for the next six months or so could do a lot more than just help you lower your loan balance. It might help you flip that loan upside down which will give you better options.

This all assumes, of course, that you are able to make your payments and have not fallen behind. However, if you can’t make the payments, it’s essential that you talk to your lender as soon as you know you can’t afford it.

Some lenders have hardship programs that will allow you to miss a payment or two because they would rather not repossess your car. Or if you know you won’t be able to pay them in the long run, you may need to prepare for a voluntary assignment.

But as long as you’re not at risk of defaulting, your best bet is to build equity as quickly as possible until you can sell the car for the loan balance and have the money to make a loan. decent down payment on an old used car. When that time comes, you will likely get a better price by selling it yourself, rather than going through a dealer.

Refinancing is unlikely to be a good option for you, unless you forgot to mention that you have a willing and solvent potential co-signer. I’m also going to assume that you bought lower rates from lenders online and couldn’t find a better deal.

But I don’t think refinancing is the best option for several reasons: First, you save less money the longer you wait because the amount you pay in interest goes down over the life of the loan. More importantly, however, it sounds like a situation where your interest rate is only part of the problem. Looks like you bought too much car. This is a problem that only downsizing can solve.

Whatever you do, don’t consider any option that will increase your loan term, even if it will decrease your monthly payment.

This is a situation where you will gain short term pain. Getting out of that loan as fast as possible is the healthiest move of money you can make.

Robin Hartill is Editor-in-Chief at The Penny Hoarder and the voice behind Dear Penny. Send your sensitive money questions to [email protected].

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