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Regardless, if you are buying a new or used car, using an auto loan to finance it should be approached with caution. We all know that all vehicles depreciate as soon as you drive it from the dealership. If you use a loan to pay for it, you will end up paying a higher amount compared to the actual value of the car. Remember that loans are usually paid with interest. By the time you finish paying off the loan, the value of the car would have gone down significantly since you bought it. Paying for cars in cash is a better way to buy vehicles and you may even be awarded with a huge discount upfront.
While the ideal scenario is to pay for it in cash, the reality is that few people can afford it. According to NewYorkFed.org, auto loans rank third as the highest debt in the country at $955 billion – with mortgage being first and then student loans. It has surpassed credit card debt and is continually rising as consumers gain confidence from the recovering economy in the US. If you cannot wait to save cash to pay for a car purchase, you are encouraged to figure out how you can save money on your car loan. That way, you can minimize the money that you have to pay on top of the actual amount of your loan.
Tips to save on your auto loan payments
Before you apply for an auto loan, it is very important that you consider how you will pay it back. It is not enough that you look at your income to see how the loan payments will fit your budget. You need to consider your other expenses and debts before you finalize the details of your car loan.
It is encouraged that you come up with a payment strategy even before you apply for the loan. It should be more than estimated numbers and figures in your head. You have to take time to sit with a pen, paper and calculator to compute how you can afford to make payments. Having a payment strategy is much better than a mere plan.
Your payment strategy will revolved around how much you can save on your loan payments. The best way to do that is to focus on your interest rate. You want to try and lower the money that you will pay towards the interest of the loan. To do this, you want to consider the following.Round up your monthly payments.
If your bill is $475, round it up to $500. The obvious benefit here is paying off the loan faster. You can be free from this debt a lot earlier – like a couple of months. But beyond that, you will also save in terms of interest. Usually, the longer the payment period, the higher the interest amount that you will end up paying for. The interest usually accrues even as you make payments and it is capitalized into your balance. The faster you lower your balance, the less interest will be capitalized into it.Make additional lump sum payments.
Any windfall income that comes your way can be paid towards your loan so you can significantly reduce it. If you got a bonus, tax refund or a monetary gift, you may want to put it towards your car loan payments instead of using it to buy a designer outfit or a new gadget. Again, your goal here is to pay the loan as fast as you can so you can save money on the interest that is paid on top of the amount you borrowed. Just make sure there is no prepayment penalty clause. It is very rare in an auto loan but you may want to check your loan details just to be sure. If there is such a clause, you will be charged with fees if you pay more than the amount that is expected from you. In some cases, the amount that you will save outweighs the penalty charge so do the math first before you decide.Opt for low interest refinancing.
Another way to save money on your car loan is to refinance it to a lower interest. If you have a 5% interest and you found a loan that offers 3% interest, switch to the other one so you can save on payments in the long run. If you borrowed the loan while you had a bad credit score, you are probably given a higher interest rate for being a high-risk borrower. If you displayed good payment behaviour, your credit score may already be up. That will qualify you to receive a low interest on a loan as long as it is a new one. See if you can get a low interest refinancing so you can shift your debt to another account.Pay more frequently.
The last tip to save on your car loan is to make more frequent payments. If you used to pay only once a month, pay on a biweekly basis. You can even pay on a weekly basis if your budget can afford it. This helps reduce the interest that will be paid for the whole life of the loan. In a bi-weekly payment scheme, you will end up make 1 extra monthly payment compared to paying only once a month.
It is important that you keep on updating what you know about car loans so you will know your rights as a borrower. The auto loan industry is continually growing and this is why the government is starting to actively participate in regulating it. According to a news article published on ConsumerFinance.gov, the Consumer Financial Protection Bureau (CFPB) will begin supervising larger nonbank auto finance companies. Before this rule, they only regulated car loans coming from banks and credit unions. Now, they can reach even non bank auto loan companies so they can help protect the borrowers from bad lending practices.
Among the regulations will include fair marketing and disclosure of car financial terms, providing accurate credit bureau reports, fair treatment during debt collection and other fair lending practices.
Tips to lower your car-related expenses
If you find it hard to get the finances to pay more towards your loan, you can cut back on your car expenses. By lowering your expenses, you can allot more money from your income and send it towards your car loan payments. The sooner you pay off your auto loan, the faster you can put your money to better use (e.g. investing, etc.)
According to AAA.com, the cost to own a car is lower compared to previous years. This lower expense is due to the lower fuel costs in 2014. Based on their report, the annual cost to own a car in the US is now $8,698 each year – which is lower by 2% compared to their last report. This is based on a typical sedan running 15,000 miles a year.
The biggest percentage comes from depreciation – which is 42% or $3,654. When new car sales are up, the depreciation of used cars is faster. While that may seem like a bad thing for current car owners, those who are buying will benefit from it. Finance charges, taking up 7.7% of the budget at $669, declined compared to last year. This is because of the highly competitive car sales market – lenders are forced to lower their rates to attract borrowers. Fuel is down at an average of $1,681 a year while car insurance, maintenance, tires, and license, taxes and registration are all up this year.
While the cost to own a car is down, you can still squeeze more savings out of that. Any amount that you can save can be sent to your car loan payments. Beyond that, here are other tips that you can use to help increase your debt payments.
- Drive properly. Did you know that you can save a lot on car expenses if you practice proper driving skills? Something as simple as the way you step on the gas can help you save on fuel. The way you use your car will also determine how expensive your car maintenance will be.
- Prefer maintenance over repair. It is more costly to repair than to maintain so make sure you are aware of the basic maintenance routine that your vehicle needs. Do not put it off because it might cost you more if something breaks down.
- Insure the car. No matter how careful you are, there are drivers out there who care nothing for anyone’s safety. You need to insure your car so accidents cannot cripple your finances or endanger your car loan payments. Choose the right auto insurance for your vehicle to protect yourself financially.
- Spend smartly on your car. Pimping your car is great – but only if it is okay with your finances. Do not buy accessories from your dealer. Experts say that it is a better idea to buy after-market products. But even then, please be very smart with your purchases. If it will not improve the condition of your car, you may want to just skip the upgrade.