Today’s guest post comes from Tom from FIREd Up Millennial. He is an up and coming blogger whose goal is to achieve FIRE by the age of 35. He has some KILLER advice on how to save serious cash on your auto loans. I know CASH is king but here is some great strategies to help if you happen to have an auto loan. ENJOY!
How I Saved $2,000 on My Auto Loan in 5 Minutes
When I initially financed my car, I wasn’t in the financial position that I am now. My credit wasn’t as great, so, of course, the interest rate was higher than it would be if I bought the car now.
Knowing this, I decided to do something about it so I could pay less for my car and pay it off faster than originally planned. While I looked into a number of strategies – such as making extra payments and making higher payments, I ended up finding one solution that could actually help me start saving right away.
The solution was refinancing my car – and I estimate it will have saved me $2,000 by the time I finish paying off my car.
To refinance my car, I had to find a lender who would give me a lower interest rate than what I currently had. Lowering that rate, however, meant I had to have good credit. I also had to prove employment and income to ensure they met the standards of the lender I wanted to refinance my car with.
Refinancing meant the lender was going to pay off what was left of my loan with my old lender, thus creating a new loan with a lower rate and a shorter term that I could pay off faster with the new lender. Overall, it’s relatively simple. I simply traded one debt for another, but with better terms.
Overall, the experience was a good one. I approached the lender wanting a lower interest rate and a shorter term. I wanted to be able to pay my car off sooner so I could trade it in for a newer model at the end of the term. I didn’t want to go to a car dealership and trade my car in with money still owed on it.
When this occurs, you’re not only financing the amount of the new vehicle, but you are adding on the balance of the old vehicle that the lender paid off with part of the loan it awarded you. This can cause the value of the new car and the amount owed on the loan to be upside down for a very long time, making it difficult to do another trade-in for a while.
I decided I was good with getting one car at a time, with the possibility of going a while without a car payment after paying my car off. The sooner a car is paid off and you are payment-free, the sooner you can start putting the amount of the car payment in your savings account or toward other debt that you need to get rid of.
When I applied for refinancing with the new lender, I was very happy with the rate. My old loan was on a term of 60 months at an interest rate of 9 percent. At the time of refinancing, I was only 12 months into the loan. This meant I had four years left to go before I paid it off.
The new term was 36 months at an interest rate of 3.6 percent which seems to be pretty typical among companies. While this increased my payment from $353 per month to $416 per month, I was able to knock off some of the time I had remaining on the loan. I also saved a considerable amount of money in interest, giving me a total savings of $1,957.
Paying the car off sooner meant having a year where I could be saving money instead of sinking cash into a car payment. Paying off sooner also translated into paying less, despite the higher monthly payment.
Well, you could refinance your car for the reason I did. I am on a mission to pay off as much debt as possible as fast as I can. I want to retire early, which means I need to put money in the bank and make some of my cash work for me in the form of investments. If paying longer than necessary on a debt can be avoided, I am going to make sure it’s taken care of.
Other people may need to refinance because of a financial setback that requires the car payment to be reduced – though it may be hard to be approved if that financial setback affected your credit. In that case, it may be necessary to refinance the car with a new 60-month term.
If I had done that and received the same interest rate, my payment would have reduced to $259 from $353. Although the debt will last longer, there is still a savings of $1,422 over the life of the loan. The good news about a lower payment is that the payment can be voluntarily increased each month to pay the loan off faster as long as there are no prepayment penalties.
All in all, you have options, and it is good to explore them. If you do look into refinancing, make sure you will be receiving a term and interest rate that will save you money rather than cost you. Also, be sure to read the fine print to make sure you don’t get dinged with fees or something else that will end up making your refinanced loan less valuable than your original loan.