How to Save Interest on Your Car Loan
More than half of new car buyers take out a car loan to purchase their vehicle. When you borrow money, it's not as simple as borrowing a certain amount and paying it right back. Lenders will charge you to access the money you need in a lump sum, and repay it in instalments - this is the 'interest' that adds to the cost of your loan.
You'll pay more interest when:
- You take out a longer loan term
- You make less frequent payments
- You have a shaky financial profile.
So how can you reduce the amount that you pay to access the money you need to buy a car?
6 Tips to save interest on your car loan
- Pay instalments as frequently as possible
- Round up your repayment
- Make a large lump sum payment
- Never miss a payment
- Understand your loan contract
- Refinance your car loan
Let's take a closer look at these six tips on how to save interest on your car loan to see why they work.
1. Frequent repayments
Even if your loan requires a monthly payment, you can save interest by making payments of half the monthly amount, fortnightly.
There's a couple of advantages to doing this. One is that you'll end up making a total of 13 full payments each year, rather than 12. Over a 5-year loan term, you'll have repaid the loan in full by 4.5 years, freeing up the last six months to move on to your next financial challenge.
You'll also pay less interest, saving on the interest you would pay for the extra six months of the loan term, and you'll save interest when you reduce your principal faster with more frequent payments.
2. Round up your payment amount
Say you've borrowed $25,000 over 3, and your repayment amount is $192.45 each week. It makes sense to round this up to $200 a week. By doing this you'll repay your loan sooner, by as much as 12 months, save interest of up to $500 or more.
It's definitely worthwhile rounding up your payment to the nearest whole figure and benefiting from this.
3. Make one large extra payment
Most of us will receive a lump sum payment at least once a year, with our tax return. If you can put a large payment towards your loan when you get your tax return, this will reduce your loan balance, bringing your end date sooner.
Over a 5-year loan term, if you can put a lump sum of $500 towards your $10,000 car loan, you could save interest of $470, as well as paying the loan out 11 months sooner.
4. Never miss a payment
Some lenders will allow you to miss a payment once or twice a year. This is a bad idea! It will only result in a longer loan term, and you'll pay more interest for having borrowed the principal amount for longer.
5. Understand your loan contract
It's essential that you understand your car loan contract before you take out the car loan. Make sure that you know:
- How to check your current loan balance
- Where to find your loan account statements
- Whether there are early payout penalties
- Whether there are extra payment limits or penalties
If you've taken out a loan that comes with payout fees, you might consider refinancing to a car loan with more flexibility.
When making extra payments, the amount you'll save needs to be more than the penalty fee.
You should also find out if you can make extra payments towards the loan balance, or principal, only. This will result in you paying less interest over the loan term.
6. Refinance your car loan
Once you've had a car loan for two years, you may be eligible to refinance it. This will benefit you if:
- You're paying a high interest rate
- Your loan has no repayment flexibility
- Your loan has account keeping and extra payment fees
Refinancing won't benefit everyone, but if you've answered 'yes' to any of the questions above, it's worth consulting with a lending specialist to see if there's car loan option that's an improvement on the one that you have now.
If you save interest on your car loan, it essentially means that your car will cost you less, and you have a little more money for the other things that are important to you. Use these tips to save interest on your loan, and take ownership of your finances.
For car loan advice, you can always contact a lending specialist, who can answer questions specific to your financial situation right now.