How to save money on your car loans

Posted by Nick Niesen on October 29th, 2010

Cars are expensive, yet almost everyone pays for them with borrowed money. To minimize the cost of ownership, it's essential to shop for the lowest-priced loan you can get.

Here's a good car buying rule: Make a down payment of 20 percent or more and finance your vehicle for no longer than four years. You can easily get into trouble when you put little money down and sign on for an auto loan of five years or more. Before you know it, you're "upside down," owing more on a car than it's worth.

When deciding on a loan term, it's helpful to see what happens to your payments when you stretch them out over a longer period.

Here's another way to cut your interest cost over the long run: Opt for more-frequent loan payments. Instead of paying once a month, ask the lender if you can pay weekly, every two weeks or twice a month. Financial institutions calculate the interest on the declining balance. Since your principal goes down each month, the interest you pay also goes down. If you make 26 biweekly payments, instead of 12 monthly payments, more of your money goes to paying off the principal. As a result, your interest costs shrink.

Installment loans come in two types, fixed rate and variable rate. You're better off with a fixed-rate loan when interest rates are rising. Variable-rate loans are best when interest rates are stable or falling.

Buy-back loan is another way to reduce costs. It's structured like a lease and provides lower monthly payments than a conventional loan. Here is how it works: The bank of financing company establishes the future resale value for your car at the end of the term you choose. Then it deducts that from the amount to be repaid.

Like leases, buy-back loans suit people who want to drive more expensive cars than they can really afford. The "owners" never really own the vehicle. Instead, they refinance every few years.

If you want to get off the revolving debt bandwagon, consider downsizing and driving a less expensive car. That way, you can pay off the loan and still have something to sell at the end of your time of ownership.

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Nick Niesen

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Nick Niesen
Joined: April 29th, 2015
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