How To Pay Down Your Car Loan Wisely
Tim Stobierski
Most people think of car loans as a necessary evil in life. Itâs rare that anyone has enough cash in the bank to buy a car without a loan . Though you might not want to take on debt to buy your car, if youâre like a lot of Americans, chances are good that you donât have many other options.
But when it comes to car loans, it pays to remember that they are considered âbad debt,â just like credit cards. This is thanks, in part, to the fact that a new car will be worth less than you paid for it as soon as you drive it off of the lot.
The good news is, you donât need to be trapped by a car loan forever. By paying down the loan ahead of schedule, you can get rid of your monthly payment sooner and save money in the form of interest at the same time â a win-win.
Wondering where to start? Here are five strategies.
MAKE BIWEEKLY PAYMENTS
Typically, you pay your car loans according to a monthly schedule, meaning that you make 12 payments each year. But if you follow a biweekly payment schedule instead, youâll make a half payment every two weeks instead of one full payment each month.
Ready to take the next step? A financial advisor can show you how all the pieces of your financial plan fit together.
Because there are 52 weeks in a year, youâll be making 26 half-payments each year, which equals 13 full payments. Youâll have made a whole extra payment on your car loan.
Recommended Reading
How To Pay Off Your Car Loan Early
1. Pay half your monthly payment every two weeks
This may seem like a wash, but if your lender will let you do it, you should. With a payment every twoweeks, youll end up making 26 half-payments per year. That adds up to 13 full payments a year,rather than 12.
If you have a 60-month, $10,000 loan, youll save only about $35 in interest, but youllrepay the loan in 54 months rather than 60. Thats six months of your life back and can be aneasier transition if you get paid every two weeks.
2. Round up
Instead of just paying what is recommended, round your payments up to the nearest $50 to help repayyour car loan more quickly.
Say you borrowed $10,000 at a 10% interest rate for 60 months, then your monthly payment is $212.47.With that payment, youll repay your car loan in 60 months, having paid $2,748.23 in interest.
However, if you decide to round up and pay $250 a month, youll repay your car loan in 47months, having paid only $2,214.69 in interest saving you $533.54!
3. Make one large extra payment per year
This is the one-time version of rounding up. But it doesnt matter when you do it.
Lets say you borrow that same $10,000 over 60 months at 10% interest. If you make an extra payment of$500 a year, you will repay the loan in 49 months, having paid $2,279.35 in interest a savings of$468.88 in interest.
4. Make at least one large payment over the term of the loan
5. Never skip payments
6. Refinance your loan
Dont Forget to Check Your Rate
Some Background: Heres Why Your Car Loan Payment Is Too High To Begin With
If youre like most Americans, you were excited to buy a new car, to breathe in the new car smell . You asked your friends about how they liked their cars, you did 15 hours of online research, researching reliability and gas mileage and so on. You checked around with a number of car dealerships to see who had the right color and who would give you the best price.
Heres the problem: you probably didnt shop for a car loan. Over 70% of us get our car loans when were signing the paperwork in the back office of the car dealership. While this is convenient, it is a terrible idea. Why? Because the car dealer probably does not have your best interest in mind when arranging a loan for you.
The problem is getting worse. Car dealership profitability has shifted dramatically over the past 10 years. Car dealers used to make most of their money the way you would expect. They buy a car from the Ford or Toyota factory, and sell that car to you for a higher price. Simple and old fashioned. But over the last 10 years, the internet has created much greater price competition among dealers for your business. The result is that we as consumers do much better and car dealers earn less when they sell you a car. Thats good for you.
Also Check: What Is The Undergraduate Student Loan Limit
Have A Down Payment Ready
A down payment is one of the most useful tools you have at your disposal in car buying. The more you bring to the table, the less you have to finance, and the more opportunities open up in your auto loan. In some cases, this can include lower interest rates.
Remember, trading in a vehicle with equity adds to the amount you put down, too.
Pursue Methods To Pay Down The Principal
As weve mentioned, if you have a simple-interest loan, you can pay it off more quickly by making additional payments toward the principal. Because youll pay off the principal faster, youll pay less interest and reduce the overall cost of the loan.
Heres how to pay off your car loan faster by making extra payments toward your principal balance.
Make biweekly payments
If you change the frequency of your payment to every two weeks, rather than once a month, youll make one extra payment every year.
Heres how it works. Divide your monthly car payment in half, and make that payment every two weeks. Youll be paying 50% of your payment 26 times a year, which works out to 13 monthly payments over 12 months.
This technique will also reduce your interest payments over the life of the loan, as youre decreasing your remaining balance at a faster rate.
Round up your car loan payments
Another way to slightly increase your payment schedule is to round up your payment to the nearest $50. For example, if you borrowed $13,000 at a 5% interest rate for 72 months, your monthly payment is $209. On a regular payment schedule, youll pay $2,074 in interest over the life of the loan.
If you round that payment up to $250, youll pay the loan off at least 13 months earlier and save at least $395 in interest.
Read Also: How Many Times Can You Refinance An Auto Loan
Use A Mortgage Broker
If you’re unsure of how to get a better deal on finance, speak with a mortgage broker.
Mortgage brokers are loan specialists. They deal in loans every day and usually have access to a range of lenders and loan types. Therefore, they may be aware of options that you don’t know about.
Additionally, they can help you to compare finance products in terms of price, features, and suitability for your situation. They can even help you to build your case for finance and to make the application.
Can I Get An Auto Loan With Deep Subprime Credit
We all know that deep subprime credit is bad and that its hard to get a loan with bad credit. It is still possible to get an auto loan with deep subprime credit.
Car loans are secured: the vehicle serves as collateral for the loan. If you dont pay the loan, the lender can repossess it and sell it to cover the balance of your loans.
Many lenders who make auto loans to borrowers with deep subprime credit require the installation of GPS trackers and starter interrupt devices that allow them to easily locate and take possession of the vehicle if the borrower fails to pay.
This reduces the risk the lenders face and makes lenders more willing to lend to people with bad credit.
Experian reports that in Q2 2020, over 19% of all auto loans went to people with subprime credit . Just under 3% went to borrowers with deep subprime credit .
That suggests that it is possible to get a car loan with deep subprime credit.
You May Like: How To Calculate Mortgage Loan To Value
Refinance Your Car Loan
If youre in a healthy financial position, you might be able to negotiate a more competitive interest rate on your car loan. If you do, try to keep the same level of repayments you were previously required to make so that you can pay off your loan faster.
Speak to your lender and see what your options are but make sure youre not increasing your loan term and dont have to pay extra fees. If you also have a car loan, it may be worthwhile making an appointment to speak to your local mortgage broker to find out if consolidating your debts would be a suitable option for you.
If you need help paying down your debt, speak to your local financial adviser who can help you manage your cash flow and help you outline clear strategies to pay off your loans faster. If you think you might want to refinance your car loan or consolidate your debt, your local mortgage broker can help you find a loan product to suit your unique financial needs and goals.
Your Credit Score Is Only The Beginning
by Warren Clarke, AARP, November 7, 2019| 0
En español | When you’re shopping for a car, you’re often shopping for a car loan, too. With autos now selling for an average of more than $37,000 new and $20,000 used, not many of us can buy without borrowing.
Just like cars, these loans come in many sizes and packages, and some are better deals than others. Here are the steps you’ll want to take to ensure you get the least expensive financing you can.
Read Also: How To Qualify For Loan Modification
Make A Payment Every Two Weeks
Submitting payments every two weeks on your vehicle instead of monthly can also help you pay off the loan a little earlier. By paying half of your monthly payment every two weeks, you end up making a total of 26 payments per year, which is equivalent to making 13 monthly payments in one year rather than 12. Contact your lender to make sure this is an option and for their assistance in setting it up.
Tips For A Lower Auto Loan Apr
Now that you know what interest is, it’s time to look at how you can get the best rate for your credit situation. It’s most effective to put these tips into practice, or to be ready to use them, before you get your car loan. If you already have an auto loan that’s difficult to afford, you may still have options, which we cover later.
Don’t Miss: What Is An Fda Loan
Consider Refinancing Your Current Car Loan
If your car loan came with a high interest rate or other monthly fees, refinancing your auto loan could provide you with better terms and a lower payment if your credit score has increased since you applied for the loan .
As you look at options for refinancing, keep in mind that your goal is to pay off the loan quickly. Refinancing with a new 72-month loan is still a relatively long time 72 months is six years, more than half a decade. Instead, youll want to look at a shorter term say 60 or fewer months and a lower interest rate, if possible. If you do refinance for a long-term loan, consider paying extra toward the principal every month to pay off the loan more quickly.
Trade In Your Car For A Lower
If you have positive equity in your vehicle, meaning your loan balance is less than the car is worth, you may be able to lower your monthly payment by trading it in for a less-expensive car.
Say you owe $5,000 on your auto loan and your vehicle is currently worth $8,000. Youd have $3,000 of equity that you could use as a down payment toward another car. A down payment reduces how much you need to borrow, and if you choose a more budget-friendly vehicle, you may be able to lower your monthly payments even more.
Read Also: What Is Bridge Loan Financing
Who Has The Best Auto Loan Rates Credit Unions Banks Or Online Lenders
Trying to figure out who has the best auto loan rates can feel like an impossible task.
It is natural to want to use your local Credit Union or Bank because you feel loyalty to the financial institution that you trust with your monthly banking needs.
In some instances, going directly through your Credit Union or Bank can be your best bet. Your bank or credit union knows your finances and may consider information other than your credit score when they make an offer.
However, local Credit Unions and Banks may be limited in the loan programs they can offer. They may not be able to compete with the lowest online auto loan rates.
You also have to consider the time it takes to go to your local financial institution to obtain a quote for an auto loan. Online lenders may give you a quote in seconds.
Be Careful!Be careful if you get an auto loan from a Credit Union or Bank that you have a checking, savings, or CD account with. Some financial institutions require you to sign a document allowing them to take payment without your permission if you do not pay.
Improve Your Credit For A Lower Rate
Knowing where your credit score falls on the FICO credit scoring model, and knowing which steps to take to build better credit helps, too. There are several ways you can get your credit reports and scores. A simple way to do this for free is to visit www.annualcreditreport.com, where, now through April 2022, you can get a copy of your credit reports from each credit bureau once a week.
Also Check: When Do Student Loan Payments Start After Graduation
You Don’t Have To Stick With A Bad Deal
It’s a common misconception that car owners have to stay with the car loan they signed up for at the purchase of their vehicle. Yes, there are costs associated with switching loans, however, it is often possible.
If you’re in a better financial situation now, than when you took out the loan, you may be eligible for a more competitive rate. This can be a great option for those with a bad credit car loan.
How Does My Car Loan Term Length Affect My Interest Charge
It is important to realize that your interest rate is not the only factor that affects the total amount of interest charge you pay for your car loan. Your car loan term length plays a major role in how much you pay for your car no matter what interest rate you have. As a general rule, for the same interest rate, the longer your term length, the more your cumulative interest charge will be.
Lets continue the example above to illustrate this principle. Suppose still that you are financing your $12,000 car with a car loan requiring you to pay a 10% interest rate. However, you have a choice between a four year loan and the five year loan that we have discussed so far. The 48 month loan would require monthly payments of $304.35 while the 60 month loan would still require the $254.96 payments. Looking at the monthly payment, you may be tempted to take the 60 month loan because it saves you money every month and this decision is not necessarily wrong. Still you should consider the effect the extra 12 months will have on the interest charges you pay over the course of the loan. Remember, you have to pay 10% interest on the balance on your loan, so the longer you owe money on your car, the more interest you have to pay.
The graph below shows how the interest charges accumulate over the course of each loan.
You May Like: Is My Loan Fannie Mae
Rate Cut By Rbi Is Not Certain As A Result Of Inflation Concerns
Although the inflation rate for March is at 4.3%, analysts are uncertain about policy rate cuts by the Reserve Bank of India . According to Morgan Stanley, the rise in inflation in the second half of 2018-19 may lead to a shallow hike in rate from October to December. As a result of continuous implementation of HRA and the reversal of base effects in food inflation, the inflation trajectory is expected to be driven to a peak in the month of June.
According to Crisil, no revision in policy rates by RBI for the next 6 months but the CPI inflation is expected to average at 4.6% next fiscal owing to increasing demand in consumption, impact of HRA revisions on housing inflation, and increasing global crude oil prices. According to Bank of America Merrill Lynch, the CPI in June quarter is expected to be 5.4%. A 0.25% rate cut by RBI is likely in August. Retail inflation has cooled down to 4.28% due to reducing food prices.
16 April 2018
