Auto loans, a story almost as old as cars themselves. You've finally found a good deal on the car that gets your heart racing, and now you are shopping around for a way to pay for it. If you have taken out an auto loan before, you may have ended up paying more than you expected.
That's why it's so important to review your contract carefully before signing. Thanks to a nice bit of law called the Consumer Leasing Act, all of those sidestepping lenders are now forced to be brutally honest, but they love to hide the facts in the fine print.
The truth is that you have the right to see the amount due at lease signing or delivery, the number and amounts of all monthly payments (e.g. $200 monthly for 24 months), as well as all fees that will be charged. These include all license fees and taxes, and any charges you may have to pay if you miss a payment or pay late.
The lender also has to tell you clearly whether or not the lease can be ended early, for example if you make extra additional payments. If you are leasing the vehicle, the lender has to tell you if you can or cannot buy the leased vehicle after your lease is up, and how much it will cost you (including any extra payments you may have to make at the end of the lease. Many lenders also place a cap on the mileage you can clock on the vehicle every year, and slap extra charges onto your payments if you go over that limit. Thankfully, this too has to be clearly stated.
Like I said, this information has to be offered to you, but it is often deliberately buried in fine print. Don't be afraid to ask for these details, and as tedious as it may be, make sure to review that fine print. While you may be able to pick up a rattletrap for a couple hundred bucks, average auto loans go into the tens of thousands.
According to Experian, the average US new car loan was $28,381 at the end of 2014, with loans for used cars averaging $18,411. The average APR (Annual Percentage Rate) for vehicle loans was 4.56% for new cars and 8.65% for used cars. The average term was 66 months for new cars and 62 months for used cars. That means the average new car buyer is paying interest of $3,761.20 on their car loan.
There are a number of ways that you can save on interest payments, and it's important that you know these before you put your name on the dotted line.
- Make Extra Payments
Most lenders want you to pay the loan over the longest time possible, and often don't allow you to pay off your debt sooner than agreed since they want to fleece you for all the interest payments you're worth. If you have good credit you should be able to shop around for an auto loan that lets you make extra payments and pay off your debt faster. If the average used car buyer made an extra payment of $1,000 every year, he could pay the loan off one year and one month sooner, saving around $200 in interest.
- Do Not Skip Payments
Many lenders give you leeway to miss a payment or two every year. This may seem like a great way out of those financial tight spots, but skipping payments will stretch the length of your loan term and cost you more interest. For example, if you have an $18,411 loan for a used car with an 8.65% APR and a 62 month term, you will pay $382 more in interest if you skip just one payment per year.
- Build Your Credit Score
The best way to save on interest payments is to maintain a top credit score. While the average auto loan APR for new car buyers with very bad credit was 13.29% at the end of 2014, those with an excellent credit score enjoyed a low 2.69% average APR on their new vehicle financing. APRs for used vehicle loans averaged 3.34% for those with excellent credit scores while those with bad credit struggled with a harsh 18.95% average APR. One of the best ways to raise your credit score is by using a credit card and making timely payments.
- Get A Low Interest Credit Card
If you are buying a cheap car or a used car, you could consider applying for a credit card that gives you a long intro APR period on purchases. If you think you can pay off the car completely in that amount of time, this could be the best way to finance your car, as you won't pay any interest at all.
Refinancing your auto loan doesn't usually make a lot of sense, unless your income changes and you can no longer afford to pay the monthly payments that you have now. An alternative to refinancing could be to transfer your debt to a low interest balance transfer card.
Another way to cut the cost of your new car is by using the co-branded credit cards offered by some car manufacturers to earn points on your everyday purchases. These points can then be redeemed towards the cost of your new vehicle.