6 ways to reduce the cost of your car loan

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Buying a car can be an expensive business. Not only are cars expensive items, but the costs associated with owning a car also add up: insurance, gas and maintenance. Unfortunately, our cars are not affected by our economic problems. When they break down for the last time and we are forced to buy a new one, finding the best financing offer becomes a necessity.

Key points to remember

  • Buying a car can be a stressful process given the high price and the many options.
  • Making sure your credit history and credit score are in the best shape possible will help you get a better interest rate on a car loan.
  • Refinancing your auto loan is always an option if rates drop and can save you a lot of money.
  • Be sure to shop around to see who offers the best deal; don’t settle for the loan offered by the dealer.
  • New cars lose a large part of their value as soon as they are thrown out of the lot. Consider buying a used car.

1. Tighten your credit

The terms of your loan are based on your credit score. If you have perfect credit, you get the lowest possible interest rate. If you don’t, you will have to pay more due to your questionable repayment history. If you’re having trouble with your credit and don’t need to buy a car right now, consider waiting for your score to go up. A simple 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 postponed). Small loans are repaid much faster than large loans. Since loan interest is how banks make money, they don’t want your loan paid off quickly.

For this reason, small loans often have much higher interest rates than larger loans. This allows the bank to withdraw a more acceptable amount of money from you. Of course, some car purchases are emergencies, and the only option may be the fastest. Set your loan limit at $5,000; anything less than this amount must come from your savings account.

If you’re sure you need to take out a loan, consider using an auto loan calculator to determine what kind of interest rate you can afford.

3. Refinance

Anyone who owns a home knows that when mortgage rates drop significantly, refinancing their home makes perfect sense. What many consumers don’t know is that they can also refinance their car. Not only does this reduce the monthly payment, but it also reduces the amount of interest you pay, allowing you to pay off your car sooner. Cars depreciate quickly, so it’s imperative that you pay off your loan quickly.

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

How much money does this save? Suppose you received a loan for $16,500 for 60 months at an interest rate of 21% because your credit was not optimal. This loan would cost you $446 per month and you would pay around $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 a little over $3,300 in interest. What could you do with an extra $116 per month? Tip: Add it to your existing car payment to pay it off faster.

4. Don’t stop at the dealership

Just as your car dealer is a middleman when he sells you a car, he is also a middleman when he wants to offer you 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 dealership, but if you stop there, you could very well end up overpaying for your loan. You’ve probably done some shopping for your car. Do the same for your loan.

5. Praise it

Leasing a car is generally considered a bad idea, largely because you’re paying a monthly payment and ultimately won’t own the car. Is renting really as bad as they say? If you’re someone who wants a new car every few years and doesn’t want to pay the repair costs of owning a car for a long 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 full value of the car. Since a lease is designed to charge you for using the car instead of buying it, you also don’t incur the full cost of depreciating the vehicle.

Leasing isn’t for anyone who wants to own the car after all the payments are made, but if you’d rather not own a car, leasing may be a good choice for you.

6. Buy a cheaper car

Seems like obvious, not-so-deep advice, doesn’t it? Unfortunately, it’s not as obvious as most think. The facts are clear; in America, people have a terrible habit of buying what they can’t afford.

They are too dependent on credit and it could be a financial disaster if a life-changing event occurs. Worse still, our nation’s belief in financial matters is that it’s okay to drown in debt for most, if not all, of our adult lives.

Should you buy a new car or a used model from a few years ago to meet your practical car needs? Do you really need a fancy car and have you really “earned the right” to buy an expensive car that will put you in even more debt? This may seem like obvious advice, but it’s worth serious consideration.

Can I reduce my car payments without refinancing?

Yes, you can reduce your car payments without refinancing. This is known as a loan modification and is done during times of financial hardship. You must apply for a loan modification and demonstrate financial hardship. If approved, the lender may reduce your interest rate for a certain period or extend the term of your loan so that your total loan is spread over a longer period, which means your payments are lower.

How can I repay my car loan early?

If you can afford it, repaying your car loan early is quite simple. The best way to do this is to increase your monthly payment above your required payment. For example, if your monthly payment is $300 and you can afford to pay $500, you can pay off your loan early. Other tips include making a large payment each year and not missing any payments. You may need to check with your lender to see if you can repay early.

Is refinancing my car loan worth it?

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

The essential

There are many ways to save money on your car payments. The final tip is to not rush the car buying process. From the start, carefully weigh all your options and you will make the choice that is right for you.

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