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 necessary.
Key Takeaways
- Ensuring your credit history and score are in the best condition possible will help you get a better interest rate on an auto loan.
- Be careful with small loans as they may have higher rates.
- Refinancing your auto loan is always an option if rates drop—this 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 excellent credit, you'll receive the lowest possible interest rate. If you don't, you'll have to pay more—generally, the lower your score is based on credit scales available, the more your interest payment will be. 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. If you pay off, pay down, or consolidate your existing credit card balances and other debts you can raise your credit score.
2. Use Caution With Small Loans
Small loans are paid off much more quickly than larger loans. 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 (for them) amount of money off the loan.
Of course, some car purchases are emergencies, and the only option may be the fast one. Set your loan limit at amount you can afford monthly payments on reliably.
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. Then, compare financing options and lenders. Don't forget to check credit unions or reputable online lenders for reasonable interest rates.
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.
After the first year, you'd have $14,415 left on the loan. If you were to refinance that amount with the same lender and got a 7% interest rate, that payment would drop to $345 per month, and you would only pay just over $2,153 in interest. What could you do with an extra $101 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 an intermediary when selling you a car, they are also a one when they want to set you up with a loan or a lease. Intermediaries always get paid for their trouble, and you are probably paying.
Before going to a dealership, get loan and rate quotes from several sources. You might even be able to get a pre-approval at a decent rate. Of course, you should get a financing quote from the dealer, but it should be one of your last options because they generally won't be able to match the rates from your bank or credit union.
You can get an auto loan from many different banks or lenders, such as Capital One, Navy Federal, NASA Federal, First Tech Federal Credit Union, and more. You can check with your current bank, too. So if you have a Bank of America account already, you may find that Bank of America also has auto loans.
5. Lease It
Leasing a car is considered by some to be a bad idea, mainly because you're paying a monthly payment and, in the end, you will not own it. Is leasing as bad as people say? If you want a new car every few years and don't want to pay the repair costs of owning a car for an extended period, leasing may be right for you.
Under a lease, payments are generally lower, but in most states, you pay sales tax on your monthly payment instead of on the car's total value. Depending on sales and property taxes in your area, the amount you pay for a lease might be less or more—but it's worth investigating.
Since a lease is designed to charge you for your use of the car instead of its purchase, you don't incur the full depreciation cost on the vehicle. If you're evaluating total costs, a lease might reduce the overall loss you incur when you sell a vehicle.
Leasing is not suitable for anybody who wants to own the car once all payments are made, but if it works out to be cheaper for you not to own a car, leasing may be a good choice.
6. Buy a Cheaper Car
It seems like an obvious piece of advice, doesn't it? Sadly, it isn't as obvious as most would think. The facts are clear: in America, people have a habit of purchasing items they can’t afford.
They rely too much on credit—an attitude that can become a financial disaster if a life-changing event occurs. What's worse, people in the U.S. have been conditioned to believe that it's ok to be in debt for most, if not all, of their 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 need a luxury car to go back and forth to work, grocery shop, take the kids to practice, or drive to Grandma and Grandpa's house? It may seem like obvious advice, but it's worth considering that less might be more.
Can I Lower My Car Payments Without Refinancing?
Yes, you can lower your car payments without refinancing. This is known as a loan modification, which can be done if you're experiencing financial difficulties. You must apply for a loan modification and prove you're experiencing financial hardship. If approved, the lender may lower your interest rate for a certain period or extend the length of your loan so that your total loan is spread out over a longer period while reducing your payments.
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 your required amount. For example, if your monthly payment is $300 and you can afford to pay $500, you'll be able to pay off your loan early. However, check with your lender to see if there are any pre-payment penalties on your loan.
Is Refinancing My Car Loan Worth It?
Refinancing your car loan may be worth it. If the interest rates have decreased or 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 not to rush the process of buying a car. From the beginning, weighing all of your options carefully can help you make the right choice for your financial circ*mstances.
