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Four Ways to Lower Your Car Payment
If you, like most of us, need to make your income go further, it’s helpful to start by looking critically at your monthly budget, starting with your biggest expenditures. Transportation costs are the second biggest category of expenses for the average American, second only to the cost of housing. We spend over $9,500 on transportation in the average year, or almost $800 capital one auto finance payoff month. These transportation costs, of course, include items like gasoline and repairs, but the largest portion of our transportation expenses by far is the cost to purchase our vehicles.
Because most new vehicles are purchased with loans, taking a second look into whether you can lower your car payment is a very smart way to improve your monthly budget. An auto loan calculator can also help victoria secret pink turtleneck sweater visualize the effect capital one auto finance payoff factor of the loan will have on your monthly payment.
Option 1: Refinance to lower your car payment with a lower interest rate
If you have an existing car loan, the quickest way to lower your car payments is to refinance the loan to a better one. On average, you can reduce your interest rate by 2.4%. The interest rate you are paying, expressed as the Annual Percentage Rate or APR, is another way of describing how much a loan costs you. Why don’t more of us look into refinancing our car loans? The answer is hiding in plain sight. Most of us do not know that we can refinance our car loans. norton customer service phone number billing Although 2.4% sounds like a small number, it could add up to over $2,200 in savings over the life of your new loan. That’s nothing to sneeze at. The average car loan is about $32,000, and the average term is about 68 months (or over 5½ years). Let’s assume you refinance five months after you bought your car. A 2.4% reduction in your interest rate would lower your car payment by over $30 per month. Multiply $30 by 64 months, and you save a total of $2,304. Now you can use that $2,304 to pay off some high cost credit card debt or take a vacation. Congrats!
Option 2: Refinance to lower your car payment by extending your term
For car loan terms, a shorter loan term means less interest paid over the life of a loan. However, lengthening your loan term can reduce your car payment every month, sometimes significantly. The car loan market is massive, with over one trillion dollars in loans outstanding. That means every kind of lender capital one auto finance payoff investor is involved in the auto loan market. As a result, the variety of car loan terms available may surprise you. Loan terms extend all the www chase toysrus com creditcard out to 84 months and beyond at the extreme.
Let’s take a typical example. Assume you have a $25,000 principal loan balance and 50 months remaining on your car loan at a 5% interest rate. If you could refinance to a 60 month term at the same 5% interest rate, your monthly payment would drop from about $550 capital one auto finance payoff $470. That’s $80 per month freed up in your budget. It is true that you will spend more in interest expense over the life of your new 60 month term, but there are times is honey pot good for you that can make sense based on your other budgetary priorities.
Option 3: For your next car purchase, buy used to lower your monthly payment by $136
Most of us have heard that the moment you drive your shiny new car off the lot, it loses 10 to 20% of its value. Nothing much has changed except that now you’re the owner of a used car. While the rapid depreciation in new car values is annoying to new car owners, it is good news for used car shoppers. Cars are now more reliable and last longer than ever before. All of this means that used cars are better options for many of us than they’ve ever been. And here’s the best part. The average monthly payment on a used car is about $400, while the average monthly payment on a new car is roughly $536. That $136 difference can help a lot.
Option 4: Lower your car payment by trading down
Maybe you did buy too much car. That 8-seater is a pain to park. The leather seats on the luxury package minivan are not impressing your kids or their friends. You could sell your car and buy a more economical model. Making this option all the more interesting, and convenient, is the proliferation of new online services that will buy your used car, like Carvana. By entering some basic information about your car on one of these sites, you can capital one auto finance payoff get a firm offer. If you agree, these companies will pick your car up at your home and bring a check with them. You can use that check to pay off your old car loan, and buy a smaller, less expensive vehicle.
Some background: Here’s why your car loan payment is too high to begin with
If you’re like most Americans, you were excited to buy a walmart asurion sign in car, to breathe in the new car smell (or at least stop smelling your old car). You asked your friends about how they liked their cars, you did 15 hours of online research, researching reliability and gas mileage and so on. You checked around with a number of car dealerships to see who had the right color and who would give you the best price.
Here’s the problem: you probably didn’t shop for a car loan. Over 70% of us get our car loans when we’re “signing the paperwork” in the back office of the car dealership. While this is convenient, it is a terrible idea. Why? Because the car dealer probably does not have your best interest in mind when arranging a loan for you.
The problem is getting worse. Car dealership profitability has shifted dramatically over the past 10 years. Car dealers used to make most of their money the way you would expect. They buy a car from the Ford or Toyota factory, and sell that car to you for a higher price. Simple and old fashioned. But over the last 10 years, the internet has created much greater price competition among dealers for your business. The result is that we as consumers do much better and car dealers earn less when they sell you a car. That’s good for you.
The flipside? You now pay a larger markup to arrange your loan than you do to buy your new car. As resourceful capital one auto finance payoff, car dealers have made up for declining earnings on the car sale where most of us don’t look: our car loans. Guess how much car dealers make for arranging your loan? $1,788 for 2018, according to the Outside Financial Auto Loan Markup Index. That’s a 70% increase from the $1,046 in markup we paid in 2010.
Look on the bright side: it’s not too late. You could have saved $1,000 you didn’t know you were spending, if you’d shopped for a car loan before you went to the dealership. But what about if you already ode to the west wind imagery your car with a loan arranged by the dealer? The average borrower saves over 2% on interest and over $50 a month by refinancing to a better loan. It’s quick and easy to figure out how much you can save (and it doesn’t affect your credit).
[Disclosure: Jon Friedland is the founder of Outside Financial and an Investopedia contributor. Investopedia does not or has never received compensation from Outside Financial]
Should You Pay Off Your Car Loan Early?
Paying off your car loan before the end of the loan term is enticing if you want to lower your monthly debt payments faster. But making that decision really depends on a few different factors like your current interest rate, monthly payment and if you can afford paying the final lump sum.
For most people, it might be worth it. But you’ll want to assess your financial situation first before making the jump.
Benefits to Paying Off a Car Loan Early
If you have the funds to pay off your car loan early, it may reap some serious benefits.
1. Improve your DTI
Your debt-to-income(DTI) ratio is how much debt you owe compared to how much money you make. The lower your DTI, the better you look to future creditors and lenders, whether that’s taking out a credit card or buying a home. Paying off your car loan will lower your DTI.
2. Save Money
Every car loan payment goes not only to the original borrowed amount—your principal—but also to your interest rate. Paying extra towards your principal lowers how much you’ll pay in interest over the life of the loan.
Paying off your loan sooner means it will eventually free up your monthly cash for other expenses when the loan is paid off. It also lowers your car insurance payments, so you can use the savings to stash away for a rainy day, pay off other debt or invest.
3. Own the Car
Paying off your car loan early means you own the car free and clear, rather than the lender. If you ever need to turn around and sell it, you could earn more from that sale than you would capital one auto finance payoff you still had a loan on it because the lender will expect payment first from the sale.
Also, taking out a car loan to pay for your car means that if you miss a payment or fall behind, the bank or lender can repossess your car. Even though you drive and maintain it, the car still belongs to someone else so long as there is a loan on it.
Downsides to Paying Car Loan Off Early
While there are some good things that come from paying off your car loan early, watch out for the downsides.
1. Prepayment Penalties
Some loan contracts come with prepayment penalties, which means that if you pay your loan off before the term is up, you could face a fee.
Keep in mind that many contracts are in place to avoid buyers paying their car loan off incredibly early, like six months after buying. If you pay yours off two years into your loan, for example, you might not face any fees. But you’ll need to read over your car loan contract or contact your lender to see if this applies to your case.
If you do plan on paying off your car very early, compare the cost of the fee to the overall savings of paying off your loan well before the final date. If the fee is more than the savings, it might not be worth it.
2. Your Money Might Be Better Used Elsewhere
Paying off your car loan early frees up a good chunk of extra cash to keep in your pocket. But it’s important to also look at how much you’re paying monthly for other debts that might be costing you more. Which one has the highest interest rate? If your car loan’s rate is low compared to other types of debt, like credit cards, consider paying off the debt with the highest interest rate first. That way you save more on total interest owed.
3. Credit Score Drop
Any time you pay off a debt, it lowers your total credit mix and open accounts, which can cause a dip in your credit score. But don’t be discouraged. Most of the time, this drop is temporary and you should see a rebound within a few months. Lenders are more concerned that you manage your debts responsibly.
How to Pay Your Car Loan Off Early
Before completely paying off your car loan, review your options to see which one capital one auto finance payoff the most sense for your financial situation, like:
- Pay off the full amount. In order to pay off the entire remaining balance, it may require a few hundred or thousands of dollars to be paid at once, depending on how much is left on your car loan balance.
- Pay a partial payment. If you got a bonus at work or maybe sold something for a hefty chunk of change, you can use that money to make a large partial payment on your car loan.
- Boost monthly payments. If you got a raise at work or a new side hustle, you can increase your monthly payments in increments. This will reduce the number of monthly payments you need to make to repay your car.
When to Consider Paying Off a Car Loan
This is a big financial decision and you should give it enough careful thought, just like you did when you first got the car loan. Consider paying off your car if:
- You can afford it. If you don’t have any other major, more expensive financial obligations, paying off your car loan makes sense. You’ll free up money in your budget to put toward other things. But if you don’t have the cash on hand, you may want to explore other options.
- You don’t have other outstanding debt. Look at your budget, including how much you bring in and what you’re paying out. If you want to save on total interest, you may have other types of debt that’s a bigger obligation. Credit cards or personal loans often have higher interest rates than car loans, which means you may want to direct extra financial resources there.
- You’re saving for a big purchase. A car purchase itself is a major financial decision, but if you’re trying to save for a home, lowering your DTI ratio and boosting your cash on hand is a big deal. You can do that through paying off your car loan early.
Not everyone has the financial power to pay off a car loan early. If you don’t have the funds to do so, you may want to look into other options. Refinancing your car loan gives you the chance to lower your interest rate and reduce how much interest you pay over the life of the loan. But it could also extend your monthly payments, so it’s important to choose a financial path that fits your situation.
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