It’s easy to get sucked into auto financing. The low monthly payments and the promise of a new car are hard to resist. However, you do want to make sure you pay off your auto loan as quickly as possible so that it doesn’t add too much extra interest to your car payment. Here are some tips for how to manage your auto loan:
Avoid unnecessary charges.
- Avoid late fees. If you can, try to make your monthly payments on time. Late fees may be a small percentage of the amount you owe, but they add up over time and become expensive.
- Avoid prepayment penalties. Some lenders charge a fee when you make an early payment or pay off your loan in full before the end of the term, so consider whether it’s worth paying the penalty if this happens to you and choose a lender who doesn’t have such penalties in place if possible.
- Avoid paying interest on early payments or late payments (or both). When paying extra money toward your car loan every month, there’s no point making more than necessary because this will mean more interest for yourself down the road!
Explore all financing options.
While it’s true that there are several car loan options, you shouldn’t just choose the first one you see. Instead, consider how much you can afford to pay each month and what your average car loan interest rate will be.
- Paying off your loans early is best for your credit history and for your wallet; if you have an extra $100 per month available to put towards your car payment, it will save you thousands in interest over time.
- Look at all of the lenders in town before deciding on one, as different lenders offer different terms depending on factors like credit score and income level.
Make large principal payments when possible.
You should make larger principal payments whenever possible to keep your loan payments low. For example, try to pay off your loan as soon as possible so that you’re not paying interest on the money lent to you in the first place. If this is not an option for you yet, it may be wise to take out a smaller car loan and then use savings or other income sources to make up the difference between what comes out of each paycheck and what is owed on the principal (total amount of borrowed money).
As per Lantern by SoFi, “Auto loan borrowers are responsible for repaying their principal loan amount and any interest and fees charged over the life of the loan. The principal is the amount you borrow, and interest would represent an additional finance charge.”
Consider refinancing your auto loan only if it makes sense.
If you decide to refinance your auto loan, consider whether it would be more beneficial to pay off your current loan early or refinance. The best option is usually the one that saves you the most money—in other words, if the interest rate on your new auto loan is higher than what you’re currently paying, there’s no point in refinancing.
Remember that refinancing your auto loan offers several benefits but is not always the best option. For example, if you can make large principal payments on your car loan, then refinancing may not be worth the cost. If you don’t have equity in your current car and want to finance a new vehicle, consider financing options from a dealership or dealer network rather than doing so alone.
