Americans have been financing cars more than ever in recent years. With the average price of a new vehicle ranging around $32,086, it's no wonder why some people can't afford to purchase their car in cash, even if they opt for a less expensive used vehicle.
At the end of 2014, Americans had $886 billion in outstanding auto loans and the average loan amount hit a record of $28,381. Financing a car doesn't have to cost this much if you work to control certain factors related to the auto financing industry. If you have an auto loan or you are considering financing a car, here are four ways to save money on your car loan.
Put Down a Sizeable Down Payment
When you are trying to finance a car, save up as much as you can to set aside for the down payment. The more you put down on a car, the less you'll have to borrow. In the best circumstances, you would ideally have time to set aside funds for a new car that you can use for your down payment. Sometimes, people use lump sum payments, like bonuses at work or their tax refund, to add to their down payment.
You can use an online car loan calculator to estimate your monthly payment based on the type of car, amount of your down payment and approximate interest rate.
Improve Your Credit Score
When you finance a car, whether it's through your bank or a dealership, the financing specialist will run your credit so see where your score is at and determine the best interest rate to offer you. The higher your credit score is, the lower your interest rate will be and the quicker the initial process will become.
Your interest rate helps determine how much your monthly payments will be and how much of your payment will go toward interest instead of the principal balance. It's important to check your credit score online or review your credit report before applying for an auto loan so you can see what type of interest rates you qualify for along with whether you need to take more time to build up your credit.
Refinance Your Loan
If you already have a car loan, once you've improved your credit you can lower your monthly payment and interest rate by refinancing your loan. Refinancing can shorter the term of your loan and allow the monthly payment to become more manageable. Calculate your estimated auto refinance with an auto loan refinance calculator to determine how much you can save.
If you have a long term, like five years, and you've been paying for at least a year, you may want to explore your options with refinancing and see if you can get a better rate to speed up the loan repayment process.
Make Extra Payments
You don't have to be limited to only paying the minimum payment on your car loan. If you have anything extra to put toward your loan each month, you can always submit extra payments. Whether it's $20 or $60, the extra payments will help decrease your balance and can even cut your term by a few months or years.
When you start making extra payments each month, your lender may send you a statement indicating that since you are ahead on payments, you owe a minimum payment of $0 for the following month or the next few months. Don't take this as a free pass. While your minimum payment may become $0 when you pay ahead on your loan for a few months, keep paying extra to save money in interest and pay off your loan quicker.