Owning a car can be considered as a necessity while for some, it could be seen as a luxury but however you choose to look at it, buying a car can be a costly endeavor. Cars are high-priced items and they also come with associated costs like car insurance, gas, and maintenance. Consequently, long-term car loans entail more overall interest. So how can one save money on car loans?
Also check out: How to Save Money on Your Car Insurance
There are several ways to save money on car loans and in this article we’ll throw more light on simple steps you can take immediately to Save Money on your Car Loan.
How to Save Money on Car Loan
1. Don’t Borrow Too Little: A simple but wise piece of advice, if you only need a few thousand dollars then you don’t need to apply for a car loan instead it would be wiser to save your money and possibly buy the car from your savings especially if it is not an urgent need. Yes, it’s true that small loans are easier to pay off compared to larger loans; however, for banks and most lenders, the interest on the loan is how they make money and they most definitely don’t want your loan paid off quickly. This is also the reason why smaller loans often have much higher interest rates than loans of higher amounts. We recommend setting your loan limit at $5,000 and if your target car is below that amount then you should use your savings to finance the purchase instead.
2. Make a Large Down Payment: Technically, you can qualify for a lower interest rate if you make a large down payment. In general, if you borrow a large amount, your lender is at a higher risk because obviously, you have a higher chance of default.
3. Always aim for a perfect Credit Score: Just like with every other thing, a perfect credit score makes a big difference and is an added advantage. So if you have a perfect credit score, you are guaranteed a low-interest rate while on the other hand, a bad credit score means a higher interest rate. Ideally, if you have bad credit, you should consider bringing up your credit before borrowing especially if purchasing the car is not too urgent. This is because even a small increase in your credit score can save you a lot of money over the life of your loan.
4. Buy a Cheaper Car: This is by far the easiest and most straightforward advice you would ever receive, don’t be in the habit of getting a car or anything else for that matter that you really can’t afford! Most people have grown an unhealthy and irrational over-reliance on credit that potentially ends up becoming a financial disaster in the long run. You must plan yourself accordingly and consider if you truly need to purchase a new car or just get a pre-owned model instead. Can you really afford a luxury car? And do you need to purchase that expensive car that could potentially put you deeper in debt? You must consider your potential financial status before making the decision to purchase a car.
5. Refinance: when mortgage rates drop significantly, homeowners are advised to refinance their homes to save money. That advice also works with car loans, refinancing your car loan might significantly lower your monthly payment and also reduce your interest amount allowing you to pay off your car sooner.
Finally, remember that cars depreciate rapidly and even more over time, making it imperative that you pay off your loan quickly.