Paying interest on a car loan can feel like throwing your money away. But unfortunately interest is unavoidable to a certain extent. Approximately 85% of all new car purchases are financed, and that adds up to a lot of money we are all paying every year to our lenders. If you are wondering “Can I avoid paying interest on my car loan?”, then we are here to answer your questions. While you can’t avoid interest altogether, there are ways to lower the amount of interest you have to pay.
Here are our top tips to avoid paying interest on your car loan.
How to reduce the amount of interest you are paying.
Make full, consistent, and on time payments
Making full and on time payments will help ensure that you avoid paying extra interest on your car loan. If your payments are incomplete, it can result in a lot of extra fees and added interest payments. If your loan has an option for automatic payments, it might be a good idea to set that up so that you don’t inadvertently miss a payment.
Round up your payments
Another great tip for paying off your loan a little early (and helping avoid some of that interest) is to round your payments up every month. Instead of paying $330 a month towards your loan, round up to $350. That extra $20 will go towards the principle and can help you pay down your balance at a faster rate.
Make an extra payment every year
If you can make an extra payment every year it will help you to pay off your loan faster and help you save on interest. Pick a time of year when you tend to have some extra cash, maybe from a tax refund or from a performance bonus, and apply that to an extra car loan payment.
Refinance your car loan
The car loan APR you have is the most important factor in how much interest you will have to pay. If your car loan APR is a bit high, refinancing your car loan is a great way to correct that.
Your car loan APR is based on a number of factors including your credit score, debt-to-income ratio, and your car. You will have a good chance of refinancing to a lower APR if your credit score has improved since initial financing, your debt-to-income ratio has lowered, or market rates have decreased.
Refinancing to a lower car loan APR can save you hundreds if not thousands of dollars, and if you use a company that specializes in car loan refinance it is super easy.
Make half payments every two weeks
If you make a half payment every two weeks as opposed to one payment every month, you will end up making 13 full payments a year as opposed to 12. This can help you pay off your loan even earlier and save you additional money on interest.
How to get the best terms on your car loan in the first place.
Make a larger down payment
Making a larger down payment up front can help you take out a lower principle, therefore allowing you to pay less interest over the life of the loan. Let’s say you are interested in buying a $30,000 car. You put a $5,000 down payment on the car and decide to finance the other $25,000. When you take into account the sales tax (let’s say it's 6%), you will be financing a total of $26,800. At 5% over a 48 month loan, you will pay $2,825 in interest. Your monthly payment will be $617.
Now let’s assume that you make an $8,000 down payment and all of the other terms are the same. Now you will only pay $2,509 in interest, and your monthly payment will be $548. Not only do you save over $300, but you are cutting your monthly payments by nearly $70. That can be a huge help over the course of your repayment.
Opt for a shorter loan repayment period
When you are considering financing, be sure to think about the repayment period. A longer repayment period will typically mean that your monthly payments will be less, but it also means you will be paying interest over a longer period of time. If you choose a shorter repayment period you will not only pay interest over less time, but you will most likely be offered a lower car loan APR.
A shorter loan repayment period will also mean that you are less likely to end up upside-down in your loan. This refers to when you owe more on your car than your car is worth. The longer your repayment period is, the more likely it is that you will end up in this situation.
Make sure your credit score is in top shape
Having a good credit score is the best way to ensure that you will get the best car loan APR possible. Your credit score is the top metric used when determining what car loan APR you will be offered, so it is definitely worth it to make sure it’s in good shape. To maximize your credit score, be sure to do the following:
Make full, consistent, on-time payments to all of your accounts.
Set up auto pay to ensure you don’t have late payments.
Pay off as much debt as possible to reduce your credit utilization ratio.
Ask for credit limit increases to reduce your credit utilization ratio.
Avoid opening any new lines of credit before applying for financing.
Cut down on spending as much as possible to reduce debt.
Get a copy of your credit report and make sure all of the information is correct. Report any incorrect information to the bureau.
Taking the time to check your credit score can make all of the difference when it comes to what car loan APR you are offered. Even if you have to wait a few months before you apply for financing, it will pay off in the long run.
Get a cosigner if necessary
If your credit score is not the best, it might be a good idea to get a cosigner on your loan. When you have a cosigner, the lender will consider both of your credit scores, credit histories, and debt to income ratios. This means that if your cosigner is in much better standing than you are, they can help you secure a lower car loan APR.
How to look out for the fine print.
Car loans are notorious for their fine print. From additional fees to prepayment penalties, there is a lot that you should be on the lookout for when you are considering financing. In addition to interest, there might be a lot of additional money you might owe.
If you are unclear about any of the terms or fine print, be sure to ask the lender. You want to fully understand what you are responsible for when it comes to your car loan.
The additional fees
Car loans often have additional fees for which you might be responsible. You will of course have to pay the origination fee (which is essentially the fee of doing business) and the registration fee, but there might be additional hidden fees on top of those. These fees may include:
Market Adjustment Fee
Shipping Fee
Dealer Prep Fee
Advertising Fee
These may vary greatly between lenders and dealers which is why you always want to read through for the fine print. There may be room to negotiate on these points as well.
The interest rate
Make sure that the interest rate is fixed, not variable. A variable rate can fluctuate a great deal and significantly impact the amount of money you will have to pay in interest. Fixed rates will ensure that you know exactly how much you will have to pay for the life of the loan.
The prepayment penalties
Does the loan have prepayment penalties? If so, this could be a lot of money you are on the hook for if you choose to pay off your loan early. This could affect you if you were simply hoping to pay off your loan, or if you were looking to refinance your loan. Try to negotiate any prepayment penalties upfront–you don’t want to be penalized for paying off your loan early.
And those are our top tips for avoiding interest on your car loan.
While paying interest is inevitable when you finance, there are ways to reduce the amount of money you will end up paying. Negotiating good financing terms up front is the most important step you can take. As you begin repayment, make sure that you are making full, on time payments while making additional payments when possible. All of this will help ensure that you pay as little interest as possible.
If you are overpaying on interest every month, consider car loan refinancing. Refinancing your loan to a lower interest rate can save you a lot of money on interest. And with the cost of everything these days, who couldn’t use some extra money?
So don’t wait–contact Auto Approve today to get started!