You Can Live Without A Car Payment
We know the idea of not having a car payment isnt as easy or as flashy as the car commercials make financing out to be. But with some hard work, a determination to stay out of debt, and some patience, your life could be dramatically different 10 years from now.
Whether youre struggling to make car payments each month or youve got student loans up to your eyeballs, all debt will weigh you down and keep you from achieving your money goals. If youre ready to ditch your debt for good, join a community of people who are taking control of their money with Ramsey+.
Youll learn how to live a life free from debt, manage your money with confidence, and save for the futureso you can actually pay cash for your dream car ! Try Ramsey+ today for free. Stop making payments. Start making progress.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
What Is The Best Way To Pay For A Car
While the thought of hitting the road with a new car can be exciting, many of us approach the car-buying process with dread. On top of finding a car that meets all your criteria and possibly having to haggle with a dealer or seller, you have to figure out how you’ll pay for it.
Many car buyers rely on financing, but don’t assume you have tothere are plenty of other tactics. Here are some of the common car payment options to consider, and what you need to know about each one.
Weigh All The Factors Before Deciding
There isnt any one-size-fits-all way to determine the best car loan. Thats why you need to take the time to understand how auto loans work and make the right decision for your specific financial situation.
Some people will benefit most by taking a longer term to reduce monthly payments and using the difference to pay down higher-interest debt. Others will prefer to make a higher monthly payment and pay off the loan sooner.
And if you have an existing car loan, you may be able to save by refinancing. Try our refinancing calculator to find out if you can lower your monthly payment by refinancing.
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Make Extra Payments To The Principal
Why it can be good. Auto loans have simple interest, which means that for every dollar you put toward the principal, you pay exponentially less interest to the lender.
Who it can be good for. Anyone who has an auto loan from a lender who doesnt penalize early payoff or payments to principal.
How to do it. Call the lender and ask how you can make extra payments to the principal only. You should do this because extra payments not to the principal means youre paying interest all youre doing is giving the bank money early. If you make payments to the principal, youre not paying as much in interest, which is very good.
Obtain A Copy Of Your Credit Report
Its always a good idea to get a copy of your credit report before you make a major purchase or financing decision.
You can get a free credit report from TransUnion, Experian, and Equifax or on a website like AnnualCreditReport.com. You can also pay one of the credit bureaus to get your actual accurate credit score.
You will be able to get a free credit report every twelve months from each of the nationwide reporting agencies.
Your credit report will give you an idea of how lenders view you, i.e. how much of a risk do they regard to them? This will give you an indication of the type of interest rates you will be offered.
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S To Take Before You Take Out An Auto Loan
If you decide to take out an auto loan to pay for your car, do plenty of research before you sign on the dotted line.
Getting preapproved before visiting a dealership can help you understand how much you can afford to spend, which can help you narrow down which car to buy. To find the best rate, get preapproved with more than one lender. Your credit score can impact whether you’re approved and what interest rate you receive the better your credit, the more favorable the loan terms will be.
When looking at quotes, you’ll want to look at the loan’s interest rate, term , any taxes and fees, and the total monthly payment amount. This can help give you a sense of the overall cost of the loan and ensure the car payment will fit within your monthly budget.
If you do take out a loan, you’ll also most likely need to put some money upfront as a down payment. The more you put down, the lower the loan balance will be and the less you’ll pay in interest fees over the life of the loan.
Make One Additional Large Payment Each Year
Making an extra payment every year works similarly to rounding up your payments each month, except you’ll make a payment all at once instead of spreading it out over the year. You may want to set aside money from tax refunds, bonuses, and pay raises for a hefty lump-sum payment toward your car loan.
The earlier in your loan term you make your extra payment, the more money you’ll save in interest, because your overall balance will be lower.
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The Bankrate Guide To Choosing The Best Auto Loans
Auto loans let you borrow the money you need to purchase a car. Since car loans are considered secured, they require you to use the automobile youre buying as collateral for the loan.
This is both good news and bad news. The fact that your loan is secured does put your car at risk of repossession if you dont repay the loan, but having collateral typically helps you qualify for lower interest rates and better auto loan terms.
Auto loans typically come with fixed interest rates and loan terms ranging from two to seven years, but its possible to negotiate different terms depending on your lender.
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At Bankrate, our mission is to empower you to make smarter financial decisions. Weve been comparing and surveying financial institutions for more than 40 years to help you find the right products for your situation. Our award-winning editorial team follows strict guidelines to ensure the content is not influenced by advertisers. Additionally, our content is thoroughly reported and vigorously edited to ensure accuracy.
How A Lower Monthly Payment Can Cost You More
One of the most important things to understand about how auto loans work is the relationship between the loan term and the interest you pay. A longer loan term can dramatically lower your monthly payment, but it also means you pay more in interest.
Consider a $25,000 car loan at a 3.00% APR and a 48-month term. Over 4 years of payments, youll pay $1,561 in total interest on the loan. If you extend that same loan to a 60-month term , youll lower your monthly payment by $104but youll increase the total interest you’ll pay from $1,561 to $1,953.
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Should You Use Your Coronavirus Stimulus Check On Your Car Loan
The answer here is a definite maybe. Given all the steps that automakers have taken to ease the financial burden of car loans, you should probably target your basic necessities first, including food, housing, utility and insurance bills. Are you paying interest on any credit cards? These rates tend to be particularly burdensome, so do yourself a favor and pay down that outstanding balance. Do you have an emergency fund for unexpected expenses? Consider adding your federal stimulus check to that fund if you don’t immediately need the cash.
But if you’ve got all those bases covered, then, yes, using your coronavirus stimulus check or Economic Impact Payment, as the IRS calls it to reduce or eliminate your car loan could make a lot of sense. You’ll get extra peace of mind from lessening your debt load, and all that future money that you would have paid in interest can stay in your pocket.
How Do I Know Who My Auto Loan Lender Or Servicer Is
If you financed your auto loan directly with a bank, credit union, or other lender , that entity is your lender. If you got your financing through the dealer, or your lender transfers servicing rights to a third party, you can generally expect that you will receive a welcome letter from your lender or servicer giving you information about your loan.
The letter should include contact information and information about how and when you make payments. Make sure you keep and pay attention to your paperwork, as it can tell you:
- Who your lender or servicer is
- Where to send your payments
- What counts as an on time payment and whether there is a grace period
- The amount of any late fees
- Whether there is a penalty if you pay off the loan early
- Who to contact if you are having difficulty making payments
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A Lower Monthly Payment On Your Car Loan Doesnt Always Mean Youre Saving Money Heres How Car Loans Work
Purchasing a car typically means taking out a car loan. If youre in the market for a new vehicle, youve probably spent a lot of time researching car options, but do you have a good understanding of how car loans work? When you take out a car loan from a financial institution, you receive your money in a lump sum, then pay it back over time. How much you borrow, how much time you take to pay it back and your interest rate all affect the size of your monthly payment. Here are the 3 major factors that affect both your monthly payment and the total amount youll pay on your loan:
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How Paying More On Your Car Payment Affects Your Credit
Paying more on your car loan affects your credit scoreand not necessarily in a positive way. Here’s what you need to know.
If you make an extra car loan payment once or twice, it probably won’t impact your credit score at all. However, if you consistently make extra payments and pay off your car loan early, it can actually hurt your credit scoreespecially if you’re just starting to build credit, don’t have many credit accounts or are trying to improve your credit score.
Once your loan is paid off, the account will be closed. Although closed accounts may show you successfully managed credit in the past, open credit accounts have a greater impact on your credit score because they show lenders how well you’re managing credit in the present. Your credit score also takes into account how long you have been using credit, so if your auto loan is your oldest credit account, closing it can hurt your credit score.
Finally, paying off your car loan could hurt your credit score if all of your other credit accounts have high balances. That’s because is a factor in your credit score. Find out more about how paying off a car loan early can hurt your credit score.
What Happens After Signing
Youve signed your lease or credit agreement. What now?
Make sure you take a copy of the agreement with all the signatures and terms filled in. Dont leave it until later to pick up a copy, as the documents might get misplaced and then you have no proof of what you agreed to.
If you chose to finance your car, remember that the lender has a lien on the car until you have paid the car in full.
The most important thing to do is to make all your payments on time. If you dont, you might end up with additional fees being charged or your car can even be repossessed. If you miss a payment, it will definitely have a negative impact on your credit report.
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What About Your Trade
If you have a car to trade in, the value of the trade-in can reduce the amount you have to borrow or the amount you must pay for the vehicle on your card or with cash. The money you get for your trade-in could be used toward your car down payment, too, if you’re borrowing.
But if you owe more than the trade-in is worth, you have a problem. You’ll have to come up with the cash to pay off the existing loan or else increase your new car loan amount so you borrow enough to pay off the old loan and buy your new car. You don’t want to do this, so avoid trading in a car until you’ve paid down the loan enough that you no longer owe more than the car is worth.
Also consider whether it makes sense to try to sell the car yourself rather than trading it in. You may get more money if you sell the car privately than if you trade it in with a dealer — although this can be more hassle than many people want to deal with. If you do plan to trade in your car with the dealer, do your research in advance so you know what’s a fair price and can negotiate with the dealer about your trade-in’s value.
You should always negotiate the value of your trade-in separately before you start haggling on the price of a new car.
How Paying Off A Car Loan Early Affects Your Credit
Paying off your car loan completely could help or hurt your credit, depending on certain factors.
When paying off a car loan helps your credit
It could help when it improves your debt-to-income ratio . Lenders often look at DTI as a way to judge your ability to take on and pay off loans. Having a completed installment loan on your credit history could work in your favor whenever you want to apply for another loan, such as a home mortgage.
When paying off a car loan hurts your credit
It could hurt your credit score, however, if you lack another type of open installment loan. Lenders tabulate open credit accounts as a greater positive toward your credit score than closed credit accounts. And without another installment loan, such as a mortgage, student loan or personal loan, youll limit your credit diversification. Even if your credit score dips slightly from paying off your car loan, it may be worth it if you have a high-interest loan. You can check your credit score here.
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Use Your Mobile Phone To Make A Payment
You can use your mobile phone to make a payment from your bank on your car loan. Youll need to have a method of payment arranged with the lender in case you dont make your payment on time, much like a pre-authorized debit.
Step 1: Organize the payment. Make arrangements with your lender to pay your car payment yourself.
Youll need to provide a credit card or alternate form of payment in the event you dont make your car payment.
Sign your loan contract, agreeing to the terms of repayment.
Step 2: Make your car payment on or before your due date. Use your mobile phones bank app or a browser on your phone to complete a payment to your lender.
If you know you wont be able to make your payment on time, call your lender to make alternate arrangements.
If you miss a payment under this agreement, you may lose the option to pay your car payment yourself, and the pre-authorized debit agreement will take over.
Step 3: Make extra payments with your mobile phone. If you want to reduce your loan term or have extra income one month, you can pay an extra payment in the same fashion.