5 Ways to Get a Smaller Car Loan
- You may not have control over car prices, but there are things you can do to secure a smaller car loan.
- That includes making a larger down payment, going with a used car and shopping around before making a purchase. You can also customize your loan term.
- Buying from a private seller can help you avoid costly dealer fees.
Buying a car can be expensive, especially if you don’t have the money to purchase the vehicle outright. According to the latest data from Kelley Blue Book, the average used car buyer can expect to pay around $26,000. That number jumps to $49,191 for a new car.
But that doesn’t mean you have to take out a huge auto loan. Small car loans do exist, and as a borrower, there are things you can do to keep your financing costs on the lower side. Here’s how.
1. Save up a big down payment
The easiest way to reduce the size of your auto loan is to save up as much as you can for a down payment. Making a large down payment allows you to borrow less. Put simply, a larger down payment reduces the overall amount you need to finance. You can also use a portion of these funds to pay any taxes and dealer fees upfront, rather than rolling them into your car loan.
The challenge for many is that saving this money can take time, especially if you don’t have a lot of disposable income in your household budget. Still, even if you’re able to put a small amount aside every month, that money can add up over time.
Let’s say you’re able to save $100 per month. After a year, you’ll have $1,200 in the bank, plus a bit more when factoring in interest. The general rule of thumb is to make a down payment of at least 10% for a used car (or 20% for a new car).
If you have a shaky credit history, bad-credit car loans are available. But regardless of the loan type, making a large down payment can help you get approved for an auto loan.
Lenders will consider your loan-to-value (LTV) ratio, which compares the loan size to the car’s value. If you borrow less than what the car is worth, your LTV will be lower. That translates to less risk for the lender, which might make them more likely to approve your application.
2. Buy used and prioritize independent sellers
Used cars are typically worth less than new ones, which is largely due to depreciation. New cars generally lose about 20% of their value after one year — and 60% within five years. Opting for a used car can help you spend less and take out a smaller car loan.
Skipping the dealership can also help minimize your financing costs. Otherwise, you could end up spending 8% to 10% on dealer fees. Buying from a private seller might also get you a lower sale price. Don’t rule out buying a car from a neighbor or family friend. You can even buy a car on Craigslist, but you’ll want to be careful to avoid scams.
If you go the route of buying a used car from a private seller, do some research on the vehicle’s fair market value before expressing interest. Consulting industry guides like Kelley Blue Book or Edmunds can be a great place to start. After connecting with the seller, don’t be afraid to negotiate the car price. Sometimes a little haggling can help you lock in a small car loan.
When it comes to financing your purchase, you can shop around and compare rates and terms from different banks and credit unions. You can also use a personal loan, but interest rates tend to be lower on auto loans because the car is typically used as collateral.
Unfortunately, not all lenders offer private-party auto loans. This is a loan to buy a car from an independent seller. If they do, be prepared for potentially higher interest rates. That’s because private sellers don’t always keep up with maintenance and won’t be able to offer a warranty. These factors increase risk for the lender.
3. Shop around for the best loan and interest rate
A lower interest rate can help reduce your total loan costs. Rates can vary from one lender to the next, so it’s a good idea to gather multiple quotes before applying.
Our auto loan calculator can give you an idea of how much you can expect to spend. You can also run the numbers using various interest rates and loan terms. Your credit score will be an important factor in generating an accurate estimate.
It’s also wise to get preapproved for a car loan. You can do this before visiting a dealership or private seller. This is an important move as dealers often charge higher interest rates when compared to other lenders. Having a preapproval letter in hand might give you leverage when negotiating dealer financing.
4. Customize your loan term
Consider how different loan terms will affect your monthly payment and total borrowing costs. For some, a small car loan is one that has the shortest repayment term. In general, a longer loan term can result in a lower monthly payment. The catch is that you’ll likely pay more interest over the life of the loan. On the flipside, a shorter loan term can translate to a higher monthly payment — but you can get out of debt sooner and pay less interest overall. Consider your monthly budget when deciding which loan term is best for you.
5. Choose a base model vehicle
A car’s trim level reflects how many bells and whistles it has. Opting for a higher trim could result in a higher sale price — and bigger auto loan. Special features can include leather interior, heated seats and other upgrades. While these features may be nice to have, they’re not a necessary part of getting around.
Small car loans can quickly turn into larger ones when you start adding on upgrades. Consider choosing a base model to keep your car loan as small as possible. You can always add extra features later down the line when you have more money to spend. Just be sure not to sacrifice when it comes to safety. For example, if you’re buying a car for a teen driver, you might be happy to spend a little more on a car that has collision-warning alerts.
If you do end up with a car loan that’s larger than you’d like, you might choose to refinance at some point in the future.
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