According to Experian's State of the Automotive Finance Market survey from the second quarter of 2016, the average new car loan came out to $29,880 earlier this year. Meanwhile, the average person who bought a used car from a franchise walked away with a $20,940 loan. The average length of these loans was 68 months (new) and 66 months (used), with average monthly payments of $499 and $378 respectively.
These huge numbers highlight just how expensive buying – and financing – a car can be. Unfortunately, avoiding a huge car loan isn't that easy since cars are so expensive to begin with.
If you need to upgrade your car and don't have the cash on-hand, a car loan might even be a necessity. To avoid a large monthly payment you can barely afford, however, it's crucial to minimize the amount you borrow as much as you can. While the car-buying process looks different for everyone, here are five ways to get a smaller car loan:
Save Up a Large Down Payment
The easiest way to get a smaller car loan is to save up as much as you can right away. With a large down payment, you can borrow less whether you buy a new or used car. You can also pay all of your lender fees and taxes out-of-pocket, reducing the amount of your loan.
Saving up a huge down payment isn't difficult; it just takes time. By and large, the best way to start saving is to figure out how much you can spare from your monthly budget, then set up automatic bank transfers into a targeted savings account.
If you can manage to save $100 per month, you'll have $1,200 after your first year. Save $200 per month, and you'll have $2,400 saved after 12 months. The more you can save, the less your car loan might be in the end.
Buy Used, Especially from an Independent Seller
The Experian study noted huge disparities between the average car loan for new cars and used automobiles. If you want to borrow less, the study easily illustrates how you can do so by buying a used car instead of a new one.
This is especially true if you can skip the dealership altogether, notes Experian. While the average car loan for a used car purchased at a dealership was $20,940 during the second quarter of 2016, the average loan when purchasing from an independent seller was just $16,456.
In other words, don't discount the guy selling his origial owner car on craigslist.org, or your neighbor with an attractive used car for sale in their driveway. If you do your research and settle on a fair price, you could save big and get a smaller car loan in the process.
Shop Around for the Best Loan and Interest Rate
While securing a lower interest rate won't lead to a smaller car loan, it will reduce the amount of money you pay for your loan over time. With a lower interest rate, you'll also score a lower monthly payment that can make your new car loan easier to handle over the long run.
A car loan calculator can help you figure out how much your payment will be based on various interest rates and loan terms. Make sure to play around with the numbers based on your credit score, then apply for instant car loan offers if you're ready.
Consider Extending or Shortening the Length of Your Loan
A smaller car loan can mean different things to different people. For some, their main goal is securing the lowest monthly payment they can get. For others, a loan with the shortest term possible is ideal, regardless of the monthly cost.
Either way, it can pay to play around with your loan details to find the best loan length and deal. Shortening the length of your loan can help you pay your loan off faster and potentially get a lower interest rate, while lengthening your loan could lead to a lower monthly payment you can easily afford.
Get a Basic Model, and Forgo All the "Extras"
While all new and used cars come with a base price, the costs can skyrocket when an auto includes special features. These features, which can include upgraded stereo systems, reverse view cameras, Bluetooth technology, and leather interiors tend to add to the overall cost of your vehicle without increasing its utility.
To get the smallest car loan possible, it helps to search for automobiles that don't include all the pricey extras and add-ons. Remember, you can always customize certain components of your car later when you can afford it.
Buying a car is never cheap, but you can decrease your car loan tremendously if you're willing to compromise. By buying used, choosing a less fancy car, saving up a large down payment, and shopping around for the best deal, a smaller car loan could be in your future.