Increasingly, Americans are taking out long-term automotive loans stretching 84 months and longer to help them get behind the wheel of cars they really want. However the longer the loan term, the greater you'll pay in interest overall.
A better option would be to pay less interest in your auto loan, that also means paying less over time for the same car. There are many methods to pay less interest on the auto loan, including comparison shopping with lenders, creating a larger down payment and becoming a shorter loan term. Here are some information regarding these and other strategies:
1. Take a look at Different Lenders
When you are buying a car, their finance department can shop and compare vehicle loans for you personally on your behalf. The drawback, however, is that dealers aren't obligated to provide the lowest rates you're eligible for.
It may be advantageous to check multiple loan offers prior to visiting the dealership. You may also apply for car loans on lenders' websites. Some lenders may even prequalify you with a soft credit check, which won't negatively affect your credit rating. While applying with multiple lenders may incorporate some time and effort, the end result might be a much lower rate of interest that saves you money over the life of the borrowed funds.
Even if your best efforts don't lead to a substantially lower rate of interest, all is not lost. In case your credit improves or market rates drop, you may be in a position to refinance your automobile later to obtain better terms.
2. Make a Large Down Payment
The more you borrow on your car loan, the more the lending company is at risk should you default in your payment. Whenever you create a sizable deposit or trade in your automobile, you lower your borrowing amount and may even qualify for a lesser rate of interest.
For example, if you put $6,000 down on an $18,000 car, you would have to borrow $12,000 and pay interest with that amount. If your loan carries mortgage loan of 5% having a loan term of 5 years, your monthly payment would be $226.45, and you'd pay $1,587.29 in total interest.
By contrast, should you didn't create a deposit and financed the entire $18,000 purchase price with the same interest rate and loan term, your monthly payment would climb to $339.68, with total interest charges totaling $2,380.93.
3. Obtain a Shorter-term Loan
Generally, lenders offer lower interest rates with shorter repayment terms due to there being less likelihood you'll default on a 48-month loan than you are on a 96-month loan. Scoring a lower interest rate will save you on interest fees over the length of the loan.
Keep in mind, however, that shorter repayment terms include higher monthly obligations. Make sure you can afford the monthly payments on a shorter loan before signing.
4. Make Additional Payments
When you pay more on your vehicle payment, you're paying off your loan faster and reducing your overall interest charges. Here are a few strategies to make additional payments in your car loan.
- Take advantage of extra income. Direct windfalls just like a tax refund, work bonus or perhaps a retroactive pay increase towards your vehicle loan.
- Round your car payment. Rounding your car payment towards the next-highest $50 is a great method to decrease your overall interest payments because you're lowering your balance at a faster rate without too much stress on your regular budget. For example, in case your car payment is $265, consider sending in monthly payments of $300.
- Make biweekly payments. Biweekly payments can also help it will save you more money on interest and pay down your vehicle loan faster than you'd by making monthly obligations. By paying half of your payment per month every other week, you are making 26 half-payments or 13 total payments per year—yet another than if you made one full payment each month.
5. Decline Options You do not Need
Whenever you finance an automobile, the sales team will typically offer several dealer options, upgrades and extras that can make the loan bigger. A few of these options include:
- Extended warranties
- Guaranteed asset protection (gap) insurance
- Service contracts
- Rustproofing
- VIN etching
- Fabric and paint protection
- Tire and wheel warranties
Make sure you understand fully what you are getting before receiving these options, because the added costs can drive up your overall loan amount and overall interest fees.
Score a Lower Rate of interest in your Car Loan
Like all creditors, auto lenders typically want credit scores to assist them to set the eye rates they provide borrowers, so boosting your credit score could help you snag a lesser interest rate. Remember, lower interest rates come with lower monthly payments, that could help you afford a car loan having a shorter repayment term.
Before purchasing a car, consider going for a moment to examine your credit score and credit rating to get a better look at your credit picture. Search for any inaccurate information or accounts you don't know on your credit report and dispute them with the credit bureaus. Also, think about using Experian Boost®o to potentially lift up your FICO® Score☉ by receiving credit for paying your utility, streaming and other bills on time.