Have you been looking to purchase a new car but the thought of paying the monthly fees for years to come is holding you back from making the investment? Or is it the monetary value of each repayment that is putting you off?
If you are looking for ways to reduce your car loan repayments without incurring a ton of interest, or simply want to own your car outright sooner, here are some things you can do.
Opt for a balloon payment
A balloon payment refers to a lump sum payment that you will have to make at the end of your loan’s term. This option allows a borrower to not only reduce the cost of the repayments but also to save on the interest.
For example, instead of taking out a loan for the full amount of a car priced at $42,266, you can choose to pay only the partial amount of $35,000 plus interest for 3 years. At the end of the 3-year term, you are to pay the remaining balloon amount of $7,266 before owning the car outright. With this strategy, you can effectively lower the repayments and save money because that final balloon payment will not incur any interest.
Here’s more on how car loan interest rates work.
You just need to remember to save up for the balloon payment at the end of the term. This should be easy enough if you have the ability to deposit a set amount into a high-interest savings account from the beginning of the term. When done right, you may even find yourself having extra cash on hand after you make the balloon payment! Which is perfect if you’re thinking about upgrading your car.
Pay a higher initial deposit
If your budget allows it, a higher initial payment will shrink the monthly costs for the duration of the term. This will also save you hundreds of dollars on interest. The only downside of this is it eliminates the possibility of investing the money you put towards the car loan deposit into a high-yielding savings account. Although you are technically missing out on an investment opportunity, there are no real losses with this financing strategy.
Extend the car loan term
If your primary concern is to make the repayments smaller each month, the easiest way to do this is by choosing a longer term. Because the principal is spread out over a longer period of time, the repayments will become smaller and easier to budget for. However, this will cause you to pay more on interest.
Keep in mind that not all lenders will approve of this so you may have to hunt for someone who will agree to a car loan term that works for you.
Consider paying weekly
Most people choose to repay their car loans on a monthly basis not knowing that it’s possible to pay every week instead. This structure allows you to save on interest, albeit minimally.
Interest on car loans are computed on a daily basis. On a monthly scheme, the interest on the principal amount left incurs for 30 days. However, when you pay weekly the interest accumulates for only 7 days. And because you bite a small chunk off the principal amount every week, you end up paying less and less on interest as the term reaches its end.
Refinance your car loan
There are instances when a person has no choice but to take on a car loan with a high interest rate and heavy repayments. This could be because they purchased the car in a rush or they simply made a bad decision. If this is you, the good news is you don’t have to stick it out until the term ends — you can refinance your car loan instead.
There are many good reasons why you could consider refinancing your car loan such as:
- Your balloon payment for an existing loan is almost due.
- Your financial position or credit rating has improved since acquiring your loan.
- You are searching for a better deal that will save you money.
- You have other loans that you want to consolidate.
By refinancing your car loan, you are switching to a better deal where the interest rate is lower and repayments are cheaper. However, you have to shoulder the exit fees from the previous lender and pay an initial fee with your new one. Before jumping ship, calculate the costs with care to make sure that you will end up paying less, not more, in the long run.
Improve your credit score
We saved the most difficult strategy for last. Sometimes, the best way to qualify for lower car repayments is by preparing for it. Years of paying your bills on time does pay off! Maintaining a good credit standing will allow you to take out a car loan with a lower interest rate thus lower repayments.
If you have bad credit, don’t feel disheartened. You can always work on improving your credit score by paying off debt in time, keeping credit card charges to a minimum, and refraining from making loan enquiries. Soon enough, your credit score will improve enough to qualify you for a car loan with a good interest rate.
Want to know more? Read our helpful tips on How to Improve Your Credit Score
Flexible Car Loans with Aussie
Need advice on which strategy or structure to choose for your car loan? Aussie Car Loans can help you determine the best way to afford a car based on your current financial standing.
We can help find the right car loan, whether you’re in the market for a new or used car. Using our car loan payment calculator before filing your application should be of great help.