Managing Your Car Loan
Whether you have an existing car loan or you hope to purchase a vehicle with a new one, these are significant debts to take on. They can be a fantastic way for you to build credit and to show your ability to successfully manage your credit if you use the loan in the right manner. If you’ve found a car you want to buy, what steps should you take to secure and maintain your car loan?
What to Look for When Choosing a Car Loan
A big mistake many consumers make when shopping for a vehicle is believing the best financing option is right there at the dealership. The car salesman may have the best vehicle in the area for you, but that does not mean they have the best car loan to offer. Compare offers from several financial institutions both online and offline to determine which can offer the best overall product. Some things to consider include:
- The interest rate. This is the actual price associated with making the purchase or the fee you’ll pay. The lowest interest rate keeps your monthly payment affordable and saves money in the long run.
- The term limit. Some lenders have extended loans beyond five years. When buying a vehicle, purchase it with a term limit that is as short as possible. In the long term, this will save you money because there is less time for a loan to build interest.
- The payoff ability. When purchasing a car, you may need, but you also may be able to pay more than the minimum monthly payment each month. When you do, you’ll eventually save money. However, some auto loans have clauses that may fine you for paying off the loan early. Choose a loan that does not do that.
- The down payment. A down payment is the amount of money you pay at the time of securing the loan to the car seller. The more you pay on the down payment, the less is financed. Be sure to make a down payment whenever possible.
- Auto insurance. While not directly related to the loan itself, auto insurance is a factor to consider when making a purchase. Be sure to check with your insurer to learn how much it will cost you to insure the vehicle and that this fits into your budget.
It is also a good idea to create a budget before you shop for your car. Think about how much of a monthly payment you can comfortably make. Is $250 the most you want to spend? Perhaps it is more or less than this. Get a dollar figure in place that you know you can pay. Then shop for a vehicle that fits that number. This way, you are less likely to purchase a vehicle that’s too expensive or with a monthly payment that will strain your finances.
Managing Debt: Good Management Tips for Your Auto Loan
Once you have your vehicle and your loan, it is time to start thinking about how to get the most out of it. That is, how should you manage your car loan to ensure it remains a good investment? These steps will help you.
On-time Payments Matter
Perhaps the most important thing you need to do as a borrower is to make payments on time. If your due date is the 15th of each month, pay by the 10th. A late payment will hurt your credit score significantly. In fact, it is so important to make this payment on time that you may wish to consider setting up automatic payments for the loan from your checking account. Because car loans significantly impact your credit history and score, view them as an opportunity to increase your creditworthiness over time. Paying on time is a key part of that.
Pay More Than You Owe
As noted previously, if you pay more than your minimum payment on your car loan, you will pay off the debt sooner. This can help you to again improve your credit but also help you to reduce how much interest you end up paying over the course of the loan term.
Think About Refinancing Carefully
One of the latest trends in auto lending is refinancing. Like with mortgage lending, refinancing allows the vehicle owner to obtain a new loan to pay the old one off. The goal in such opportunities should be to save you money. Here are some things to consider.
- If you are struggling to make your monthly payment on your loan because it is too high, refinancing may help you to get a lower payment.
- Refinancing will extend the length of the loan, meaning you may have to repay your debt longer.
- Look for an interest rate that’s lower whenever possible. One or two percentage points lower can significantly reduce what you will pay.
Most importantly, if you plan to refinance your auto loan, make sure your vehicle is in good condition and will likely still be operational over the long term. If the new loan term is five years but the car isn’t going to last that long, it isn’t a good idea.
When it comes to buying a car, many people choose auto loans to make it possible. With smart financial decisions, it is possible to gain not only the car you want but also an affordable investment that can help you to build your credit over time. Managing debt like this is simply financially smart.*
*This article provides broad and general guidelines and does not constitute professional or legal advice. You should not use this article as a substitute for your own judgment, and you should consult professional advisers before making any advertising, tax, legal, financial planning or investment decisions.