Buying a car is often a necessity for most people these days. With that in mind, securing a suitable car loan is imperative. But before you act, there are ways to cut the cost of your car loan and help you pay your debt faster. Find out the tips here!
Car loans can be costly if not managed carefully. It’s important to monitor the interest you pay on your car loan. This article will provide you with seven strategies to lower your car loan expenses and make it more affordable.
Ways To Cut The Cost Of Your Car Loan
- Refinance The Auto Loan
- Make Extra Payments
- Compare Prices
- Buy A Used Car
- Improve Your Credit Score
- Consider A Shorter Loan Term
- Negotiate With The Dealer
1. Refinance The Auto Loan
A very good way of reducing the cost of a car loan is by refinancing it. When you refinance, you effectively take out a new loan that pays down the original loan. The new loan typically has a lower interest rate or better terms, such as shorter or extended repayment terms.
This means a smaller amount on the loan payment and interest payment. To accomplish this, first, find lenders and compare their rates and terms. If your credit score goes up or if the interest rates drop since you took out the initial loan, you may be eligible for a much better deal.
Read also:Â Top Banks That Can Refinance An Auto Loan With Bad Credit
2. Make Extra Payments
You going the extra mile to pay more than the minimum due amount each month, you can decrease the principal value of the loan and, in turn, pay less in interest over the life of the loan.
Further payments, however, can be quite significant. The larger they get, the faster you can pay off the loan and save on interest in the end.
For instance, if the monthly repayments for a five-year loan of $20,000 at an interest rate of 5% are concerned. You paying an extra payment of $50 each month, you could save over $1000 in interest over the life of the loan, and it will be paid off about a year earlier.
Some lenders may offer you the option of making bi-weekly payments instead of monthly payments, which will also help you pay off your loan more quickly, along with a reduction in the interest paid.
In this way, you will not only reduce the interest you will eventually have to pay, but you will also decrease the term of your loan.
3. Compare Prices
Shopping for a favorable loan? Then you must check all the suitable offers in the market. If you have a 5% interest car loan, see if another lender can offer a lesser interest rate.
You might find a lender with a 4.5% interest rate or one that offers a longer loan term and lower monthly payments. Comparing rates and terms from various lenders can help you save more money.
With a good credit score or a good financial history, you might be eligible for a better loan offer. Don’t be afraid to ask – the worst they can say is “no”. However, shopping around and comparing rates might end up getting you a car loan that you can afford.
4. Buy A Used Car
Buying a second-hand car is one of the fastest ways to cut the cost of your car loan. If you were to buy a car that would cost you $25,000 and the loan duration is 5 years at an interest rate of 4%, your monthly payments would be about $460 and you would be required to pay about $27,600 ($460*60) as interest for the whole duration of the loan.
Now, let’s assume you’re looking to buy a 2-year-old used car of the same brand and model, but the price is $15,000.
In this case, if you keep the loan term and interest rate the same, your monthly payment would decrease to around $275, and the interest paid would be $1,500. (275*60 ie: 5*12) -$15000).
It’s a $185 per month saving and a $1,500 total interest saved only by opting for a used car instead of a new one.
If you buy a used car instead of a new one, the cost of the loan is reduced considerably and you can save a lot of money at the end of the day.
5. Improve Your Credit Score
Having a good credit score is like having a strong foundation. If you’ve been working hard to improve your credit score over the last 12 months, that’s great!
Now that you’ve saved up enough to buy a car, you can proudly apply for a loan and use the money you’ve saved. With your strong credit score, you’ll get a lower interest rate compared to someone with a lower score.
For instance, if the average interest rate for a car loan is 6% APR, then with your good credit, you are given an interest rate of 4% instead of APR.
For a five-year loan of $20,000 on a car, with this interest reduction, you could save more than $1,500 in your interest payments.
6. Consider A Shorter Loan Term
Although it may be enticing to select a longer mortgage term to decrease your monthly installments, the overall amount you will be paying will be higher this way because of higher interest fees.
One of the advantages of a shorter loan term is that you can pay off your loan in a shorter time and save interest.
For example, you are seeking a car loan worth $15,000 with an annual interest rate of 6%. In the case of a 4-year term, you will end up with over $2,300 in interest payments.
Though, if you go for a 3-year term, you’ll only be charged around $1,700 in interest. With the auto loan calculator tool, you can see how much interest will be reduced in the shorter loan term.
Therefore, if you can make slightly higher monthly payments, choosing a shorter loan term helps you reduce expenses and pay off the loan faster.
7. Negotiate With The Dealer
Car dealerships sometimes have some flexibility around interest rates. Feel free to negotiate for a lower interest rate, a longer loan term, or even the cancellation of any fees.
Research the current interest rates and loan conditions before visiting a car dealership. The process of negotiating with the dealer might seem like a long process but you will end up saving a substantial amount of money.
Considerations For Your Car Loan
i. Interest Rate
The interest rate affects the total amount of money that needs to be repaid. Low-interest rates mean lower monthly payments and less interest paid through the repayment period.
ii. Compare interest rates
Check among different lenders and go for the most affordable. In addition, check other terms and conditions.
iii. Loan Term
The loan term, which is the number of months you have to repay the loan, affects both your monthly payment and the total interest paid.
Sometimes shorter-term loans have higher monthly payments, but in the long run, they are still lower than longer-term loans. Take a look at your budget and financial goals when it comes to loan term selection.
iv. Fees
Look at the fees that come along with the loan, like the origination fees, application fees, prepayment penalties, not paying on-time fees, etc.
These fees do not make up the cost of the loan itself; therefore, during the decision process, they should be taken into account.
v. Down Payment
The down payment is the first amount you pay when you want to buy a car. A bigger down payment decreases the amount of loans, consequently, resulting in lower monthly payments and less total interest rate.
Ask yourself how much you can save and decide if you want to make a big down payment to reduce the loan amount and slash the interest you pay.
vi. Loan Conditions
Read through the loan agreement’s terms and conditions thoroughly. Understand aspects like whether the interest rate is fixed or variable.
Are there options for early repayment or refinancing, and what happens in the event of a default? Choose a loan with a payment schedule and terms that are compatible with your budget.
Conclusion
There are quite a few ways that can help you cut your car loan cost and make it more affordable.
Through refinancing your loan, making extra payments, shopping around for the best deal, buying a used car, improving your credit score, considering a shorter loan term,etc, you will save money and repay your loan quicker.
Try out these strategies to see which ones you find most helpful.
