Smart Financing: Experts Explain How To Save Money on a Car Loan
Written by
Jordan Rosenfeld
Edited by
Chris Cluff
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Many people can’t purchase a new or used car outright and must take out a car loan, but that also means taking on interest over time and even coming up with a sizable down payment depending on the loan.
While a loan may be unavoidable, paying too much doesn’t have to be. Creative solutions and careful planning can reduce the amount you ultimately spend.
Experts explain how to save money on a car loan.
Also, should you wait for better interest rates?
Consider Longer Loan Terms to Save on Monthly Payments
While you may be in a hurry to get your car loan paid off, “Extending your loan term from 48 months to 60 or 72 months lowers your monthly payment,” according to Andrew A. Lokenauth, a finance expert and founder of Be Fluent in Finance.
Of course, it also means you’ll ultimately pay more in interest; but, if you can afford the monthly payment and expect to keep the car for many years, it’s worth it, he said.
Consider Shorter Loan Terms To Save on Interest
On the other hand, if your concern is saving on interest over time, then you may want to consider a shorter loan term, according to Joe Giranda, director of sales and marketing for CFR Classic.
“If manageable, this requires higher monthly payments, so it’s essential to ensure it fits within your budget,” Giranda said.
Refinance Your Current Auto Loan
If interest rates have dropped since you got your loan, refinancing can reduce your monthly payment and save you money on total interest charges, Lokenauth advised.
“Check your existing loan contract in case prepayment penalties apply for paying off early,” he added.
Giranda pointed out that while refinancing can reduce your monthly payments and the amount of interest you pay over the life of the loan, “It’s important to weigh the benefits against any fees associated with refinancing to ensure it’s a financially beneficial move.”
Make a Larger Down Payment
More up front leads to less later on.
“Putting 20% or more down, rather than the minimum 5% down payment, saves on total interest paid over the loan,” Lokenauth said.
Additionally, a significant down payment may help you secure a lower interest rate, as it reduces the lender’s risk, Giranda added.
If you can’t pay a larger amount up front, Lokenauth suggested, “Consider using savings, rewards credit cards or a personal loan.”
Negotiate the Car Purchase Price Before Financing
Be prepared to negotiate when you go to a dealership.
“Car dealers often bake their profit margin into the interest rate quoted after purchase discussions,” Lokenauth said.
Thus, if you can negotiate down to a lower sale price first, you’ll need a smaller loan and lower payments than the dealer’s initial offer.
Pay More Than the Minimum Due Each Month
Putting even an extra $25 or $50 toward principal with each payment cuts the loan length and saves in interest charges compared to the minimum payment plan, Lokenauth said.
Even better, he said, “Seeing the balance go down faster is motivating to continue higher payments and eliminate the loan sooner.”
Improve Your Credit Score
The best way to save on a car loan is to boost your credit score before applying, since higher credit scores are typically rewarded with lower interest rates, according to Ann Martin, director of operations at CreditDonkey.
“Reducing your current debt is one of the most effective ways to accomplish this goal,” she said.
If you don’t have the luxury of time to boost your score, make an effort to shop loan servicers.
“This will help you ensure you’re paying the fairest rate for your loan,” Martin said.
If all else fails, consider refinancing after you’ve had your loan for at least a year, she said. Refinancing may not save you money up front, but it’s a great way to reduce the cost of your loan in the long run.
Shop Around for a Loan
Shopping around for your car loan is as important as choosing the right vehicle, Giranda said.
“Different lenders offer varying interest rates and terms,” he said. “By comparing offers from multiple lenders — including banks, credit unions and online lenders — you can find the best deal available to you.”
He urged you not to hesitate to negotiate the terms of your loan, as some lenders may have flexibility to match or beat competitors’ offers.
With one or more of these options, you should be able to get an affordable loan you can live with.
