When they’re purchasing a car, it’s almost second nature for many consumers to secure a loan without giving much thought to the interest that comes with them.
Don’t believe me? Think about the last time you secured an auto loan. Did you use an amortization calculator beforehand to determine how much you’d end up paying for the vehicle over the life of the loan? In some cases, you will find that the cost of the loan actually outweighs the benefit of owning the vehicle.
Fortunately, there are ways to escape the wrath of the auto loan interest monster. Here are a few simple options to consider:
1. Round up
Not only will you save in interest by rounding up to the nearest hundred when you pay your bill, but the car will be paid off faster.
To illustrate, let’s assume you purchase a car for $20,000 with an interest rate of 3.9 percent and term of 48 months. This yields a monthly payment of $450.69. However, rounding this figure up to $500 will shave five months off of the payment term.
If you can secure a lower interest rate, refinancing may be worth a shot. However, don’t be fooled into thinking that you should take advantage of the lower monthly payments and extended terms to give your wallet a break, or you will end up paying more in interest.
3. Double up one month
Have you been stung by the luck bug and been gifted an unexpected sum? Use your newfound money, whether it be a tax refund, work bonus or inheritance, to make at least one extra payment for the year. You can also divide the monthly payment by 12 and remit this amount each month in additional to your usual amount to achieve the same result.
Using the same example from above, this method will shave three months off your payment term.
4. Cut costs
Do you find it difficult to scrape up extra funds to pay down the auto loan balance faster? Start by making cuts to variable expenses. Need a few ideas? Skip pampering sessions and dining out for a while or cut all the high-end entertainment. Also, set a grocery budget for the week and stick to it.
Still no luck? Try selling some of the items lying around your home that you no longer need.
5. Pay often
This will require stellar record keeping on your part, but if you frequently allocate residual income to the loan, you will knock interest out of the park. However, be sure to speak with the lender about any restrictions or penalties that may apply for early loan payoffs.
6. Never skip a payment
The skip-a-payment option is an enticing offer my credit union likes to make around the holiday season to help customers free up funds for gifts and travel expenses. But don’t fall for the trap, because you will have to make it up in the end. The lender simply extends the loan to account for the extra payment and accompanying interest.
7. Make biweekly payments
If permitted by your lender, make half the monthly payment each time you get paid to reduce the interest paid over the life of the loan. Reasoning? Well, there are 26 pay periods in the year, so you will end up making one extra payment for the year using this approach.
If you are in the market for a new or new-to-you car, you always have the option of stashing a nice sum of cash away so you can afford to make a handsome down payment. This will equate to a more affordable monthly payment from inception, and enable you to pay off the car faster with excess income.