December 2, 2023

Car Auto Finance

Car Auto Finance FOR Everyone

6 Ways to Cut the Cost of Your Car Loan

Buying a car can be a costly endeavor. Not only are cars big-ticket items, the associated costs with owning a car add up as well: insurance, gas, and maintenance. Unfortunately, our cars aren’t concerned with our economic troubles. When they break down for the last time and we are forced to buy a new one, finding the best deal on financing becomes a necessity. 

Key Takeaways

  • Purchasing a car can be a stressful process given the large price tag and many options.
  • Making sure your credit history and credit score are in the best condition possible will help in getting a better interest rate on an auto loan.
  • Refinancing your auto loan is always an option if rates drop and can save you a significant amount of money.
  • Make sure to shop around for loans to see who is offering the best deal; don’t settle for the loan the dealership is offering.
  • New cars lose a large amount of their value as soon as they’re driven off the lot. Think about purchasing a used car.

1. Tighten Up Your Credit

The terms of your loan are based on your credit score. If you have perfect credit, you receive the lowest possible interest rate. If you don’t, you have to pay more because of your questionable repayment history. If you have problems with your credit and you don’t need to purchase a car right now, consider waiting until your score increases. Just a small increase in your credit score can save you a lot of money over the life of your loan.

2. Don’t Borrow Too Little

If you only need a few thousand dollars, don’t apply for an auto loan. Instead, save your money (if your car purchase can be put off). Small loans are paid off much more quickly than larger loans. Since the interest on the loan is how banks make money, they don’t want your loan paid off quickly.

Because of this, smaller loans often have much higher interest rates than loans of higher amounts. This allows the bank to make a more acceptable amount of money off of you. Of course, some car purchases are emergencies, and the only option may be the fast one. Set your loan limit at $5,000; anything below that amount should come from your savings account.

If you’re certain you’ll need to take out a loan, consider utilizing an auto loan calculator to determine what kind of interest rate you’ll be able to afford.

3. Refinance

Anybody who owns a home knows that when mortgage rates drop significantly, refinancing their home makes a lot of sense. What many consumers don’t know is that they can also refinance their car. Not only does it lower the monthly payment, but it also reduces the amount of interest you’re paying which allows you to pay off your car sooner. Cars depreciate rapidly, making it imperative that you pay off your loan quickly.

Before stepping foot in the dealership, do all the research you can on the model you’re interested in, such as average costs, what add-ons can be included, financing rates, and your cut-off price, to be ahead of the salespeople.

How much money does it save? Let’s assume you received a 60-month loan for $16,500 at a 21% interest rate because you had less than optimum credit. This loan would cost you $446 each month and you would pay approximately $10,300 in interest over the life of the loan.

If you were to refinance and get a 7% interest rate, that payment would drop to $330 per month and you would only pay just over $3,300 in interest. What could you do with an extra $116 per month? Hint: add it to your existing car payment to get it paid off faster. 

4. Don’t Stop at the Dealership

Just as your car dealer is a middleman when selling you a car, they are also a middleman when they want to set you up with a loan or a lease. Middlemen always get paid for their trouble, and the person paying is probably you.

Of course, you should get a financing quote from the dealer but if you stop there, you may very well end up paying too much for your loan. You probably did some shopping around for your car. Do the same for your loan.

5. Lease It

Leasing a car is generally considered to be a bad idea, largely because you’re paying a monthly payment and in the end, you will not own the car. Is leasing really as bad as people say? If you’re somebody who wants a new car every few years and don’t want to pay the repair costs that come with owning a car for an extended period of time, leasing may be right for you. 

Not only is the payment lower, but in most states you only pay sales tax on your monthly payment instead of the total value of the car. Since a lease is designed to charge you for your use of the car instead of the purchase of it, you also don’t incur the full cost of depreciation on the vehicle.

Leasing is not right for anybody who wants to own the car once all payments are made, but if you would rather not own a car, leasing may be a good choice for you.

6. Buy a Cheaper Car

It seems like an obvious and not so profound piece of advice, doesn’t it? Sadly, it isn’t as obvious as most would think. The facts are clear; in America, people have an awful habit of purchasing what they can’t afford.

They have an overreliance on credit and that could be a financial disaster if a life-changing event happened. What’s worse, our country’s belief when it comes to financial matters is that it’s ok to be drowning in debt for most, if not all, of our adult lives.

Do you have to purchase a new car or a pre-owned model from a few years ago to meet your practical needs for a car? Do you really need a luxury car and have you really “earned the right” to purchase an expensive car that will put you deeper in debt? It may seem like obvious advice, but it’s worth considering seriously. 

Can I Lower My Car Payments Without Refinancing?

Yes, you can lower your car payments without refinancing. This is known as a loan modification and is done during times of financial difficulty. You have to apply for a loan modification and prove financial hardship. If approved, the lender may lower your interest rate for a certain period of time or extend the length of your loan so that your total loan is spread out over a longer period of time, meaning your payments are smaller.

How Can I Pay Off My Car Loan Early?

If you have the means, paying off your car loan early is fairly straightforward. The best way to do so is to increase your monthly payment above what your required payment is. For example, if your monthly payment is $300 and you can afford to pay $500, then you’ll be able to pay off your loan early. Other tips include making a large payment every year and not missing any payments. You may have to check with your lender if you can pay off early.

Is Refinancing My Car Loan Worth It?

Refinancing your car loan may be worth it. If the interest rates have gone down or if your credit score has significantly improved, you may qualify for a lower interest rate, which will reduce your monthly costs and the overall cost of the car. Keep in mind that if you are almost finished paying off your car loan, it may not be worth it to refinance as there will be costs associated with refinancing. If the costs plus the amount you’d save combined don’t put you in a better financial position than completing your current loan, it may not be worth refinancing.

The Bottom Line

There are numerous ways to save money on your car payments. The final word of advice is to not rush the process of buying a car. From the very beginning, weigh all of your options carefully and you’ll make the choice that’s right for you.