Managing your auto loan: 5 strategies
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Your work isn’t over after you exit the dealership lot behind the wheel of your new vehicle. Instead, you must take important steps to manage your auto loan to ensure the vehicle remains yours. Consider the following steps after getting an auto loan.
1. Be mindful of your budget
While you have already crunched the numbers to secure the right auto loan, you must keep your budget in mind. Now that payments have begun, you can gauge how they fit into other finances.
Edmunds advises that a new car payment should be no more than 15 percent of your take-home pay — 10 percent for a used car. If this number does not fit your spending, consider cutting back in other categories.
2. Set up autopay
Arranging automatic payments each month on your auto loan is an excellent way to protect against accidentally missing payments and falling behind.
Most lenders offer this option. Some even boast additional discounts for using autopay.
Simply reach out to your lender to add your bank account information. Remember that some bank-funded auto loans require a checking account with the same financial institution if you want to use autopay.
3. Work toward early repayment
Early repayment means that the vehicle can become yours sooner. Plus, you will pay less on interest over the loan’s lifetime. Try making extra or larger payments or applying tax refunds to the principal.
But before making this choice, use an early payoff calculator to determine if it’s the right move. Also, confirm that your lender does not enforce any fees for early repayment. If there’s a prepayment penalty, ensure your savings would outweigh it.
4. Consider refinancing
If you struggle to make your auto payments — or if making regular payments has helped your credit score improve — refinancing can help you get better rates and terms. Refinancing involves getting a new loan, potentially with a new interest rate or term length, and using it to repay your old loan.
This isn’t the perfect solution for every borrower. Before moving ahead, calculate potential savings. If refinancing your auto loan isn’t the best solution for your finances, but you have other outstanding debts, consider refinancing a different loan instead. You could free up extra cash to pay down the auto loan.
5. Communicate with your lender
Throughout your loan, it is best to keep an open line of communication with your lender. Regular contact ensures your loan is in good shape and protects you in the future. Building a strong relationship now will help manage potential issues.
If you, for example, think you might miss a payment, the door has already been opened for support. Remember, if trouble arises, the key is to reach out sooner rather than later.
The bottom line
Taking the right steps in managing your auto loan ensures that the vehicle will be yours once the loan is paid off. Otherwise, you could be left in a tough financial spot, potentially without a vehicle.
But if you keep your budget in mind, arrange for autopay, aim for an early payoff, consider refinancing if needed and communicate openly with your lender, the vehicle will be all yours in no time.
Frequently asked questions
A long-term car loan means a lower monthly payment. But, even though your monthly payment will be less, the cost over the entire loan will be more because you’ll be paying more interest.
It is best to pay more towards your car loan principal. Because most car loans use simple interest, paying the principal reduces the amount you would have to pay in interest.
There is no perfect lender for every borrower. Compare different auto loan options and look for available APR, fees and customer support.
This approach breaks down one approach to setting your car budget. You make a 20 percent down payment on the loan balance and choose a four-year term. The resulting monthly payment should be under 10 percent of your income.