If you’re thinking of buying a car, this article is for you. Below, you’ll learn six ways to save money on a car loan. After all, cars are expensive enough, especially when you factor in insurance, gasoline, and ongoing maintenance. And as you’ll read in our first strategy, the interest that you pay on an auto loan can be significant. Here’s how you can minimize those costs.
1. Raise your credit score
Your credit score plays the biggest role in determining the interest rate you’ll be charged on an auto loan. The most popular credit score brand used my over 80% of all creditors is from a company called FICO. Based on your payment history and other factors, FICO will assign a score that reflects the quality of your credit. Your score will fall within the range of 300 to 850. The higher your score, the better.
So, just to give you an example of how much more you could pay on a car loan, I secured the help of a handy dandy auto calculator that you’ll find here.
As I write this, the interest rate that a bank would charge you on a 48 month car loan for $15,000 is as follows, based on your credit score:
– FICO Credit score 740…interest rate 4% ( Car payment $338 per month)
– FICO Credit score 550…interest rate 17% (Car payment $432 per month)
The difference between the two payments is $94 per month. Over 48 months, that comes to $4,512. I don’t know about you, but that is a hefty penalty to pay simply for having poor credit. But that’s the reality.
The bottom line is that if you want save money on an auto loan, keep your credit clean.
2. Comparison shop auto loan interest rates
When you’re out shopping for a car, and you find the one you want, it’s so easy to just let the dealer work out the financing details, right? Hey, I totally get it.
But the dealer isn’t your friend. They aren’t there to get you the best or lowest auto loan interest rate. Their goal is to make money on the loan. It’s one of their biggest sources of revenue, beyond the profit margin on the car.
So the second way to save money on a car loan is to comparison shop. For example, credit unions have always had a reputation for providing lower auto interest rate loans to its members than regular banks.
You can have the loan approved and ready to go before walking into a dealership.
3. Get a cheaper vehicle
In the annual product survey guide published by Consumer Reports, you’ll find reliability ratings for just about every car on the market. And what you’ll quickly discover is that price plays virtually no role in determining a vehicles reliability and safety.
It’s not at all unusual to see many $12,000 cars that are just as reliable as those costing $80,000 or more. My point is that if you can find a nice low-mileage used car for a reasonable price, you’ll avoid a big monthly car note. This way loan interest charges won’t be an issue.
4. Lease rather than buy
I know people who trade-in their cars every 3-4 years like clockwork. That’s certainly different from me who will hold on to a car until the engine is just about to fall out of it. Well, I’m not that bad. But my track record has been to keep cars until repair costs are excessive or reliability becomes a concern.
So, if you’re someone who never keeps a car very long, then leasing your vehicles might be a better way to go. In general, you’ll spend more in the long-run by stringing together one lease after another, but your monthly payments will be lower and there won’t be a need to take out a loan.
5. Pay In Cash
No, I’m not suggesting that you should write a check for $20,000 to purchase a car. However, it’s probably not worth the added interest cost to take out a 5 or 6 thousand dollar loan on a car. Such small loans tend to carry even higher interest rates.
Instead, if you aren’t in desperate need of a car, then save up the money beforehand and pay for it in cash.
6. Refinance your auto loan
In an earlier example, I showed you how your credit score can affect the interest rate you’ll get on a car loan. It’s possible that your credit could significantly improve a year or so into the loan. In addition, the economy could change in way that causes interest rates to fall.
In either case, it could be worth your time and effort to refinance the loan. As you saw above, a difference of $100 per month adds up to real money over time.
So there you have it, six ways to save money on a car loan. I think the most important strategy is to clean up your credit file 9-12 months before you start car shopping. Short of paying in cash, this will ensure that you’ll get a great deal no matter which other option you choose.