When your desire is to become debt-free, you must work hard to save money, increase your income, and pay off loans.
Besides a mortgage and a student loan, auto loans often prevent many adults from becoming completely debt-free. While paying for a car outright with cash is the best way to avoid building debt, most adults don’t have access to such capital.
And with car loans becoming more accessible to potential car buyers and borrowers, a car loan can add a significant amount of interest, furthering the loan’s repayment plan.
If you’re looking for ways to remove this costly item from your monthly budget, here are five proven tips to consider.
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Determine the details of your loan
When you’re borrowing from the bank, dealership, or car finance company, you must understand the fine print associated with your loan.
Because certain lenders make it difficult to expedite car loan payments, due to a decrease in interest payments, you must understand the full details of your loan. Some lenders will even impose a prepayment penalty or fee for early payoff, so it pays to be informed.
Using a car loan repayment calculator will allow you to determine savings in interest payments if you pay off your car loan earlier.
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Negotiate the price
Successful negotiations will reduce the car’s MSRP, allowing you to save money and clear your car loan faster. When negotiating with a dealer or the previous car owner, negotiate as if you were prepared to pay with cash.
Asking some key questions, such as how long the car has been sitting on the lot, will provide you with the negotiating power to ask for a lower price. This technique works best when the timing, opportunity, and demand is right.
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Consider novated leasing
A popular lease standard in countries like Australia and the U.K., novated leasing is a three-way agreement between a car finance company, an employer, and the employee (you). This leasing method is particularly useful for company cars as it’s a cost-effective way to drive your car of choice.
This type of lease agreement bundles together all the costs of vehicle ownership and allows you to make payments from your pre-tax income. This means payments can be deducted from your income, potentially increasing your tax return and saving you money in the long run.
A novated lease is also portable, meaning if you change jobs, you can take the vehicle with you and enter into another Novation Agreement with your new employer and the financier.
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Pay bi-weekly
Car loan payments can also be accelerated with a bi-weekly payment plan. Bi-weekly payments diminish interest charges and add two extra payments a year; 26 bi-weekly payments against 12 monthly payments.
To further whittle away at a car loan, consider rounding off your payments. Rounding off payments to the nearest 50 or 100 dollar can help you pay off the loan faster without the additional interest charge.
Making one large payment per year or over the term of the loan can help pile on further savings. Similar to rounding off, one larger payment can shave significant time off the loan.
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Refinance your original loan
Refinancing your loan can be a good solution to reducing interest rates. This is particularly useful if your original or current car loan came with high-interest rates and other monthly fees.
Refinancing provides opportunities to gain better terms on your loan agreement.
Keep in mind, refinancing is meant to help you achieve financial freedom. Don’t refinance with another extended loan agreement as this will stretch out payments longer. When refinancing, look for shorter terms and lower interest rates.
This method works best for borrowers with good or great credit. If you have poor or bad credit, you can improve your credit score by making on-time monthly payments in full.
Other ways to pay off your car loan
When the goal is to become debt-free and achieve financial freedom, you must prioritize the debt. You can make extra payments by establishing a side income or asking your employer for a raise. Put these extra earnings towards the car loan.
If additional income is out of the question, consider using lump-sum payments such as your tax refund or work bonus to reduce a significant portion of your car loan.
About The Author
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.
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