Car payments are starting to resemble rent and mortgage payments due to high interest rates and inflation. According to data from Edmunds, 17.4 percent of new 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 finance conditions: car buyers found little relief from high interest rates and high prices, which in turn they have hindered the growth of new vehicle sales,” said Jessica Caldwell. Edmunds’ boss, in a press release. “The Fed’s decision to cut rates was a welcome update at the end of the quarter, but by itself is unlikely to dramatically change the financial landscape for car buyers.”

If this is your situation, you have options. Refinancing is a common way to lower your car payment getting a better interest rate or extending repayment terms. Plus, put your nest egg in a high yield savings account you can earn interest (the good kind) that you can put toward your monthly car payment.

Refinancing your auto loan can save you over $200

Car loan refinancing can lower your monthly payment by lowering the interest rate, extending the 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 main ways:

• A lower interest rate lowers your monthly payment: After 10 months, you have $42,680 left on your loan. You decide to refinance at 7.00% with a new 60-month loan, making your new monthly payment $845. That’s a savings of $169 per month.
• Extend the repayment term: After 10 months of payments, you will have 50 months left 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 drop by $149. It may seem like a setback to “start over” on your loan term, but the extra 10 months can be worth it for the extra room in your monthly budget. You just need to know that increasing the loan term also increases the total amount of interest you will pay over time.

Refinancing works best when car loan interest rates have dropped since you bought your car. Although The Federal Reserve has cut rates at its September meeting, the cost of borrowing is still high. Rates are expected to drop in the coming months and years, so it might make sense to hold off on refinancing to get the best deal. You may wonder why you don’t refinance more often—now and then again as rates continue to fall. This is an option, but there are trade-offs.

“Consumers are encouraged to compare auto loan options because rates fluctuate frequently,” said Melissa Caro CFP, founder of My Retirement Network. “However, it is 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 gone up. You may not have had the best credit history when you got your car loan, but your credit score improved after a few 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 dropped since taking out the loan, your best bet to lower your bill with a refinance may be to extend the term of the loan.

Offset your interest payment with other interest

There is an upside to high interest rates: they also apply to savings account balances. When it’s most expensive to get a car loan because of high interest rates, it’s also the best time to keep your money in a high yield savings account. Earning interest on your savings while paying off your car loan could mean being able to make one extra 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 into a high-yield savings account with a 5.00% APY (compounded monthly) will earn you $83 in interest in one month and $1,023 over the course of a year (with no additional contributions). You can use that annual interest to make an additional car loan payment per year, reducing the length of the loan and paying less interest.

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

Remember that any interest you earn in a high yield bank account is subject to tax.

“It’s important to note that interest earned in a HYSA is taxable,” Caro said. “Therefore, if you are in a higher tax bracket, your effective after-tax return could be lower than expected.”

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

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