With increasing gas prices, owning a car can be very expensive! If you need a vehicle for work or due to lifestyle needs, finding cheaper financing can help to save some money. There are several ways to cut your car loan, so that you do not have to struggle with the monthly payments.
1. Improve Your Credit
Your borrowing cost depends on your credit score – the higher the better. If you have perfect credit, there are many manufacturer’s financing at 0% APR. Yes, you can get an interest free car loan so that you save a lot of money over buying a new car. Now you know why some people can afford to change a new car every year? They have very good credit scores and need not pay interest on car loans.
If you have some problems with your credit history and can postpone the car purchase for a few months, use the time to improve your credit score. Even a small reduction on your loan rate can save you hundreds and thousands of dollars over the entire loan term.
2. Avoid Borrowing Money To Finance a Car Purchase
We are not talking about buying a $50,000 new car in cash, since only the super rich can do that. But for buying a cheap used car under $5000, there is no need to apply for an auto loan. Take your time to save up for the purchase because smaller loans carry a higher interest rate compared to larger loans. This is because banks give APR discounts for larger car loans, but never let that be an excuse for borrowing more than what you need just to upgrade to a nicer car. Otherwise, you would have fallen into the trap laid by lenders to make more money from a large long term car loan. For a small car loan of $5,000, you may as well save up and pay in full cash.
Many people do not know that they can refinance their car loans for cheaper rates and lower monthly payments. Since cars depreciate more rapidly compared to homes, you should try and pay off your loan quickly to avoid going upside down. Whether you can refinance or not depends on the prevailing interest rates. Note that you cannot refinance a car lease, since the vehicle do not belong to you even at the end of the lease term.
So how much can a car loan refinance save? Assuming you have a 60 months auto loan for $20,000 at 20% APR, which is typical for someone with poor credit. That means you need to pay $485 each month and the total interest over the entire loan period is $14,673. By improving your credit and refinance at 7% interest rate, you only have to pay $345 a month. If you decide to refinance your auto loan, we recommend paying off the loan at a faster rate.
4. Avoid Dealership Financing
You will not be able to get the best financing deals from your car dealer, since they will be adding some commission fees to your quote. Make sure you get approved for financing before you go down to the dealers. Otherwise, you may end up paying too much for your car loan. By shopping for your own car loan, you will also understand what is your latest credit score and the type of car loan APR you are eligible for.
5. Lease a Car or Buy a Car
Some people do not like the idea of leasing a car since you have to pay every month and do not get to own it in the end. It is like renting a car for 3 to 4 years. So if renting an apartment sounds bad to you, leasing a car probably does as why. So why do people still choose to lease a car or truck instead of taking a loan? Well, leasing a car is cheaper compared to buying and you can choose to change it to the latest make/model every few years. You can also avoid the cost of depreciation by leasing a car, since the dealers only charge you for you usage.
6. Buy a Cheaper Car
If none of the above methods to reduce you car loan can help, simply buy a cheaper car. It can be a smaller vehicle or an used one. Never try to buy a car you cannot afford, even if there are lenders willing to finance your car purchase. It can be dangerous to exceed your credit, so if buying a $50,000 new car brings your debt-to-income ratio above 40%, stop immediately. You may feel that it is possible, but a 60 month car loan is a long time. What if you lose your income during this period? Do you mind losing your car to repossession because you cannot pay on time?
If you do not need a luxury car, there is no need to stretch your finances and credit just to feel good about a proud car owner. Car loans are considered expensive consumer debts, which are best kept to a minimum.
Try to use the above ways to save money on your car loans. There is no need to rush through your car buying process, especially for first time buyers.