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Publish Date - October 10, 2022

Author: Bradley Braun

Categories:   Tips & Insights For Car Buying    Auto Loans & Financing    Refinance To Save    Consumer Credit    Loan Calculators & Rates   

4 Clever Ways To Reduce The Costs Of Your Car Loan

Regardless of where you live, owning a car has become a necessity because of the convenience it provides. Aside from convenience, owning a car comes with other benefits, such as privacy, safety, flexibility, and freedom. For these reasons and more, many people think of getting their own personal vehicles.

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Regardless of where you live, owning a car has become a necessity because of the convenience it provides. Aside from convenience, owning a car comes with other benefits, such as privacy, safety, flexibility, and freedom. For these reasons and more, many people think of getting their own personal vehicles.

However, a car is a considerable expense, and you may not have enough cash to finance your car purchase. In this case, you have the option to secure a car loan from your bank, car dealership, or an online lender.

Before applying for a car loan, note that purchasing a car is one thing. You also need to understand the hidden costs of owning a car. There are many other costs involved, such as preventive maintenance, insurance, fuel, and parking fees, among other things.

Since all these costs will add up over time, it's critical to look for ways to save money whenever possible, specifically by reducing the cost of your car loan.

The following article discusses what you need to know about car loans. You'll learn some smart ways you can apply to minimize the cost of a car loan, so read on.

1. Be Cautious With Your Vehicle Choice

The choice of vehicle significantly influences the cost of your car loan. If you choose a cheaper vehicle or model, you'll spend less money on your loan. For instance, a car loan for a hatchback or sedan will be lower than that for a sports utility vehicle (SUV). Besides a lower price tag, mid-sized or subcompact cars are cheaper to own and operate than the latter. You'll pay lower insurance rates and spend less on fuel, maintenance, and other expenses.

Another option is to consider a pre-owned rather than a brand-new car. Buying a used car may be more practical as the upfront price is considerably lower. However, be sure to get a vehicle history report and have a mechanic conduct a thorough inspection of the car you're considering to buy.

In addition, getting an affordable yet reliable car will make more sense for people with poor credit scores. Making timely payments will be more manageable, boosting your credit score.

Furthermore, it's important to ensure your car loan payment doesn't practically wipe out your monthly income. You can utilize a car loan calculator to determine the amount to be financed, your monthly payment, and total interest payment. Knowing these figures can help you decide if you can afford the car you're looking to buy.

2. Refinance Your Car Loan

Refinancing your car loan is another clever way to reduce the cost of your car loan. There are certain situations where refinancing a car loan might be helpful. One such case is when your credit score has improved since you bought the car, and you have the money to put as a down payment for your new loan.

You can utilize the above situation as leverage to negotiate new loan terms, including interest rate reduction. A minimal interest rate will lower the overall cost of your car loan.

There are several ways you can refinance your car loan. Dealer financing is one of your loan options, but it's probably the most expensive. On the other hand, banks, private lenders, and financing institutions may offer lower interest rates. If you choose your local bank, it's crucial to understand their terms for customers who add car loans to their current banking relationship.

However, when refinancing your car loan, it's critical to ensure that you get a repayment plan that meets your goals. It's also important to understand that making lower monthly payments doesn't necessarily mean a reduction in the cost of your car loan. The reason is that the interest rate is typically higher when you opt for a longer repayment term. Thus, you'll pay more in the long run.

3. Make A Large Down Payment

Making a considerable down payment, say 20% to 25%, may help reduce the cost of your car loan. Here's why doing so makes a lot of sense.

If you can pay a significant amount of money upfront, you'll have to borrow less money to finance your car purchase. Borrowing a lesser amount will reduce the interest that accumulates over the life of your car loan. Additionally, making a substantial down payment will shorten your loan term. Hence, you'll manage to pay off the car loan over a short period.

For these reasons, it's essential to save up some money for your car's down payment. You can open a bank account and make a deposit each month. This ensures you have enough money to make a significant down payment, reducing the cost of your car loan.

4. Build A Good Credit Score

Your credit score will determine the conditions and terms of your car loan. People with good credit scores are usually offered lower interest rates, cutting the cost of their car loans. On the other hand, if you have a poor credit score, you may be charged a higher interest rate. Thus, you may end up paying more in the long run.

Before getting a car loan, it's critical to understand your credit score to avoid paying higher interest rates.

Paying bills on time is one of the ways you can use to improve your credit score. Late payment of bills may lower your credit score. If you miss a payment, it's advisable to call the creditor. Then make plans to pay up as soon as you can.

You may also convince the creditor not to report the missed payment to the credit bureaus. Moreover, ensure you request your account statement and take the time to review it to avoid missing payments of bills that could affect your credit score.

Bottom Line

A car is no longer a luxury but a necessity for most people. Because it's a high-ticket item, most people opt to apply for a car loan to finance the purchase. However, it's important to discover clever ways you can reduce the overall cost of your car loan, allowing you to ultimately save a lot of money.