Making an auto loan affordable
If you are looking for ways to bring down your family’s auto costs, it might be time to evaluate how much you’re paying on your car loan.
Whether you want to evaluate your existing car loan or look for a new one, here are five car-smart choices financial pros say you can make to reduce your auto loan burden in 2011.
If you have a high interest rate on your auto loan, shop around and see if you can get a lower percentage, says John Chladek, a Certified Financial Planner in Overland Park, Kan. That way, you may pay less in interest and possibly get the loan paid off quicker.
“Interest rates are pretty low right now, especially if your credit score is reasonably good,” he says. Borrowers with a preferred credit rating of around 740 or more typically qualify for the lowest rates.
“Check with your bank to see what they’re offering. Sometimes, if you have other loans with them, they may give you a lower rate,” he says. Another option is to look at auto loan ratings sites online to compare.
One word of caution: If you end up switching your car loan from one lender to another, check your old loan contract to make sure you won’t be penalized with an early payoff fee, Chladek says.
If your credit score isn’t high enough to reach the preferred category of interest rates, your strategy for this year could be to work on improving your credit by paying down other loans or avoiding new debt, he says.
Pay down your auto loan
If you are looking to pay down your auto loan, take time out to evaluate your personal budget. You may find you can free up cash by trimming other expenses such as cutting back on eating out at restaurants, or renegotiating your auto and home insurance policies.
“I encourage people to keep track of their spending and see what discretionary items can be eliminated so more money can be used to pay off debt,” Chladek says.
Another way some people can get cash to pay down their car loans is to use their tax refund checks, he says. Just don’t make it an annual habit. “If your tax refunds are large every year, you really should update your IRS Form W-4 to make sure you’re not having too much tax withheld,” Chladek says.
Negotiate with your lender
If you are unable to pay your car loan, see if you can negotiate with your bank for a payment plan that will help you get out of the money crunch, says Scott Crawford, founder of DebtGoal, a consumer debt-relief company in San Francisco.
“It’s important to keep your loan provider informed of your circumstances,” he says. Your lender probably wants to keep you as a client, so it’ll try to work with you, he says. But the bank will need to know the reasons you’re unable to make payments, such as a loss of job or a reduction in hours worked.
When the loan company understands your situation, it may be in a better position to offer assistance, maybe letting you make a late car payment or even offering to let you refinance your auto loan.
“If you speak to your lender first, you could stay on good terms as it relates to communication,” Crawford says.
Dump burdensome debt
Car owners who have trouble making auto loan payments also should consider selling their vehicles to see if they can buy a car that’s more affordable, Crawford says.
“A $500 or $600 monthly car payment, or any payment that’s too much for your budget, can eat up a lot of cash,” he says. If you sell your first car and buy a less expensive auto to replace it, you may be able to drop your payments, or eliminate them by purchasing the cheaper car free and clear.
This option may be harder for people who are upside down on their car loans, meaning they owe more on their existing auto than it’s worth, Crawford says.
If that’s the case, even when a car is sold, the owner will have to come up with extra money to pay the lender to satisfy his or her auto loan. However, if the seller is able to do it — perhaps by borrowing from friends or family — he or she can reduce a huge debt burden, says Crawford.
Research new car purchases early
An owner who plans to trade in his existing car and buy another one this year should check established research resources, such as the Kelley Blue Book, to determine the value of the trade-in, Chladek says. In addition, the owner should contact funding sources, including credit unions and local banks, for information about auto loans.
All this should be done before you first walk into a car dealership, so that you’re not tempted to sign a poor financing contract so you can drive the car off the lot the same day.
Chladek also suggests that consumers who plan to obtain a new car loan should get a standard loan term, such as 36 or 48 months. Longer loan periods may give the borrower an initial lower monthly payment, but he or she will pay more money in interest over the long run, Chladek says.
The more interest you pay, the greater your risk of being upside down in your car loan, he says.