8 Tricks to Manage Your Car Loan Effectively
Taking out a car loan is a big financial responsibility. Apart from the monthly repayments, you also have to pay for the car insurance, fuel, toll fees, parking and various maintenance expenses that come with owning the vehicle.
Because of this commitment, it is important to manage your car loan efficiently to make the repayments easy on your budget while also tending to your other financial responsibilities and goals.
Here are a few tricks to help you:
1. Calculate how much you can afford for a car loan.
Before taking out a car loan, make sure to get an estimate of your monthly repayments. This will give you an idea of the upcoming financial responsibility.
Use a free car loan calculator online to easily compute your possible repayment based on the amount you want to borrow, loan term and interest rate. Keep in mind that most of these online car loan calculators do not include the application fee and other associated loan charges are often not included in the computation.
To get a better estimate, request for a quote from lenders or apply for a car loan pre-approval. This will also help you shop around for better deals without your inquiry showing up on your credit report.
2. Choose an affordable car.
Some car dealerships and car lending companies advertise for luxury vehicles that seem affordable to finance. Generally, this happens when the loan term is extended for a long time--The monthly repayments are distributed over the course of the loan, which makes it seem friendly on the budget.
What you may fail to consider is that while the repayment amount is low, you would be making the repayment for a very long time, monthly interest and maintenance fees included. Additionally, many car experts advise against taking out a car loan with a term that’s longer than 7 years because new cars depreciate in value fast.
On top of the monthly loan repayments, there are many other car-related expenses that you need to pay for. These include fuel, insurance, maintenance and repair as needed. You will also need to pay for a 33% luxury car tax, which is charged if your car has a GST-inclusive value above the LCT threshold. For the financial year 2019-2020, the threshold has been increased slightly by the ATO from last year’s $66,331 to $67,525. The tax fee varies according to the model and price range of your car.
3. Get a loan with a short tenure.
A car loan with a shorter tenure of 1 to 2 years results in a bigger amount of monthly repayments compared to one with a longer term. However, you can pay off your loan early. This will help you save money on interest.
A long-term car loan of 3 years or more results in lower monthly repayments because your loan balance will be distributed over a long time. However, you will also need to pay for the loan’s interest in that duration. While the monthly repayment amount is affordable, you may find it hard to save for other financial goals because of your debt obligation. Furthermore, your financial situation may change a few years after taking out the loan. If you lose a job or fails in your business venture, the debt obligation will become an added burden to your already financially stressful situation.
4. Offer a large down payment.
A large down payment decreases the amount of money financed by your lender, which means less risk for them. Not only will you have a better loan approval chance, but you will also lower the total cost of your loan because your down payment will be deducted from your loan balance. As a result, your instalment amount will be low and won’t weigh heavily in your pocket.
5. Adjust your budget.
Your repayment obligations, day-to-day expenses that come with using the vehicle, like fuel and parking; and the necessary repair and maintenance can take a chunk of your budget. Including them in your monthly budget helps you allocate your income more efficiently. It also helps you follow through with the repayment amount and schedule.
6. Don’t miss out the monthly repayment deadline.
Like other types of credit, a car loan has a late payment charge, which serves as a penalty for making a required minimum payment on debt after the due date. It can be as high $40 for the first late payment and $55 for subsequent late payment. The longer you fail to catch up with the repayment, the bigger the late payment fee becomes.
Apart from encouraging you to make timely repayments, the late payment charge is one way for the lending companies to make money. Whether or not your late payment is due to a simple oversight or a sign of financial trouble, you will be charged. If you fail to make the minimum credit card payment, you will have to pay interest in addition to a late fee.
Some lenders are lenient about one or two instances of late repayments that they can let you get away with the late fee penalty if catch up with the repayment quickly and continue making timely repayments in the future repayments. However, if you continue missing repayments, you will face serious consequences. Your account may be subjected to penalty repricing, which causes your interest rate to increase because your credit provider considers you as a high-risk borrower. Your credit score will also plummet, especially since your payment history is the biggest factor that influences your credit rating.
To avoid being late or missing out your debt repayment obligation, set up a direct debit for your car loan repayments. You can also ask your lender to schedule your repayments at a more convenient time or asking for an extension if you’re really financially struggling.
7. Refinance your loan
Did you discover a more affordable car loan program from a different lender a few months after owning your car? Did your credit score improve one year after taking out your loan? With car loan refinancing, you can get rid of your existing debt and pay a lower interest rate on a new auto loan. You can also reduce your car loan or switch to a fixed-rate or variable-rate loan by refinancing your loan.
Since your car depreciates in value as the year goes by, make sure to refinance only when your loan is still "right side up”.
8. Get a debt consolidation loan.
If you have other debts to repay, feel too burdened with the repayments and can no longer afford to pay off your debts on their end term, you can get a new loan to consolidate your debt. This new loan pays off everything else, helping you manage and track your debt more effectively. If your new loan has a lower interest rate, you can save a good chunk of money every month.
A debt consolidation loan, however, is usually available if you have a good credit rating and you won’t have any trouble paying off your existing loans.
Drive your dream car in just 2 weeks with the help of the car loan experts at Positive Lending Solutions. We team up with a wide network of lenders across Australia to find the right lender for your financing needs. Call us on 1300 722 210 or fill out our Car Loan Pre-Approval form.