Making car payments is a chore we all engage in, and it can be an expensive one. But if you know how to work the system, you can cut down on the costs to a surprising degree.
Where To Find Savings
Before we begin, we should note that what you borrowed is what you borrowed; you’re not going to somehow make your loan principal disappear without paying it. Finding savings comes in changing the other parts of your loan; the term of the loan, or how long you’re paying it, and your interest rate.
It’s easy for us to forget that the interest rate is the price we’re paying to “buy” the loan, and not just the price of doing business when we get a car. And unlike most of the products you buy, the price is negotiable. To save money on your loan, you either need to lower your interest rate, or reduce the amount of time you’re paying on your loan. So how do you cut down on those?
Pay Extra, As Much As Possible
You should check with your loan officer before making an extra payment; some loans won’t allow you to deviate from the payment schedule, even if you’re giving them more money, not less. But if you can, you should make extra payments or pay more wherever you’ve got the cash.
For example, if you get paid every week, work out an automatic deduction for your loan that works out to a quarter of your monthly loan payment. Over the course of the year, that will take out an extra monthly payment from your loan, and it has the added benefit of ensuring that your loan is always paid.
Another method is to round up to the nearest $100 on your car payment. For example, if you pay $351 a month, round that up to $400. It may not seem like much next to a car loan, but do the math: $49 extra a month, every month, works out to $588 a year. Even better, this “monthly payment” doesn’t go to interest, but to the overall principal … so it drives down the interest you pay, saving you more money.
Another step is to refinance your loan. Many of us got our car loans when we had less than perfect credit, and even if your credit still isn’t perfect, if you’ve spent a few years improving it, refinancing will drive down your interest rate.
Even just a point less of interest can make an enormous difference to your budget. Say you have $10,000 left on your loan, with four years of payments left, at 10% interest. Your monthly payment will be about $253 a month. Dropping it by just one point would save you $6 a month, $72 a year … and $288 over the life of your loan. We could all use an extra $288, and that’s just the worst case scenario. Especially if you had to accept an unusually high interest rate, you can cut down your yearly payments by hundreds of dollars.
So, if you’ve got a car loan, look into cutting back on what you pay. It’ll save you more than you think.