When you turned 16 and got your first driver’s license, you were likely thrilled. Hopefully your newfound freedom didn’t cloud your judgment too much regarding the surrounding costs of buying a car and getting an auto loan. Whether you are considering taking out an auto loan or are trying to pay off an existing one, here are some strategies to keep in mind.
Shorten Your Auto Loan Repayment Plan
Whether you already have an auto loan or you’re considering taking one out, there are two numbers you should keep in mind: your down payment, and how much that loan will cost you per month. The more you pay up front, the lower the monthly cost will be. Auto loans typically come in 72-month terms, or six years.
However, you can save yourself a lot of interest by choosing a shorter loan term or simply paying off the loan early. If you haven’t gotten an auto loan yet, see if you can afford a larger down payment to shorten your repayment plan. If you already have one, figure out how much you are paying on it per month. Ask yourself if there’s wiggle room in your budget to start making bigger payments. The shorter the repayment plan, the more you save on interest.
If you take too long to repay your loan, you may end up paying more on your car each month than your car is actually worth. You can use an affordability calculator, like this free one, to find a monthly payment plan that works for you.
Ask about Discounts
You don’t get what you don’t ask for. There are a variety of discounts and one-time savings that could be available to you if you’re brave enough to ask. Some car dealerships have special offers for college students with good grades or who have recently graduated with a degree. If you’re a member of the military, if you have AAA insurance, or if you have an account at a credit union that the dealership has a partnership with, you could be eligible for monthly savings on your auto loan.
Manufacturers may have cash rebates available through certain dealerships as well. You can also ask about refinancing options if you have an existing auto loan. If you’re willing to do the research and ask the right questions, you could save yourself a substantial amount on your auto loan.
Understand the Relationship Between Auto Loans and Insurance
You are legally obligated to get insurance for your car. What you might not realize, though, is that the kind of insurance you get can be influenced by your auto loan. If you owned your car, you would only have to have liability insurance. However, if you have a car loan, many insurance companies will also require you to purchase collision coverage in case you hit another vehicle.
If you made less than a 20% down payment on your car, your loan may be so great that you could be required to get gap insurance. Gap insurance covers the gap between how much you owe on the car and how much the car is actually worth.
Think about Your Budget Holistically
Experts recommend that your auto loan should be about 15% of your take-home pay, and your total car costs should only be about 22% of your take-home pay. In order to make sure you have enough money for your other life needs, be cautious about how much you’re spending on your auto loan.
Even if your monthly auto loan payments and interest charges are within your budget, there may be other costs that come up. You’ll need to account for car repairs, maintenance, gas, add-ons, and more. As you consider how much you can afford to spend, remember to think about other expenses and how these charges can fit into your budget.
A financial advisor can help you create a plan to pay off your auto loan. Their expertise can help you create a budget that minimizes the interest you’re paying on your auto loan while keeping your other financial goals in mind. Get matched with a financial advisor today to discuss your auto loan.