Other Auto Loan Debt Topics

Taking on an auto loan is a big financial decision that can impact your finances for years to come. While interest rates and monthly payments are key factors to consider, there are many other important auto loan debt topics to be aware of as well. This article will discuss some of these additional considerations in a conversational tone, using simple language and examples.

Know the Total Cost of Your Loan

When shopping for an auto loan, it’s important to look beyond just the monthly payment amount. You’ll also want to consider the total cost of the loan over its entire repayment period. This includes not only the principal you borrowed, but also all interest charges. Auto loan interest rates can vary quite a bit between lenders, so make sure to compare all-in costs. NerdWallet has a helpful auto loan calculator to estimate your total costs [1].

Watch Out for Extra Fees

In addition to interest charges, some auto lenders may tack on extra fees that can add to the overall cost of your loan. Watch out for fees like:

• Origination fees – Charged upfront for processing the loan
• Prepayment penalties – For paying off the loan early
• Late fees – If you miss a payment

Ask the lender to clearly explain any fees associated with the auto loan to avoid surprises. NerdWallet’s auto loan calculator includes a section to estimate fees [1].

Consider Down Payment Options

The size of your down payment can significantly impact the total cost of your auto loan. Putting more money down upfront will reduce the amount you have to borrow and therefore the amount of interest you pay over the life of the loan. Most experts recommend at least a 20% down payment if possible.

However, some lenders offer loans with little or no down payment. While this may seem appealing, it also means you’ll be paying more interest in the long run. Carefully weigh the pros and cons of low versus high down payment options for your situation.

Understand the Loan Term

Auto loans typically range from 24 to 84 months (2 to 7 years). Shorter term loans have higher monthly payments but you pay less interest over the life of the loan. Longer terms are easier on your budget each month but cost more overall.

In general, a shorter term is better if you can afford the higher payments. But make sure to run the numbers for loan terms that work for your budget [1].

Check Rates Frequently

Interest rates can fluctuate frequently. So if you’re not quite ready to purchase a car, check rates periodically so you’ll know when they are favorable. Online sites like Bankrate allow you to easily view rate trends over time [2].

If you already have an auto loan, you may also benefit from refinancing if rates drop significantly. Online lenders like LendingTree make it easy to compare refinance rates [3].

Compare Lenders

Rates and fees can vary widely amongst auto lenders, so it pays to shop around. Compare offers from banks, credit unions, and online lenders. You can visit lender websites individually or use an auto loan aggregator like LendingTree to compare multiple lenders at once [4].

Getting pre-qualified by multiple lenders also shows you the rates you qualify for based on your credit score. This helps set realistic expectations before you head to the dealer.

Look Into Loan Forgiveness

Some employer and military programs may help pay off your auto loan debt. For example, the Army’s Hometown Recruiter Assistance Program provides up to $20,000 for recruiters to pay existing auto loans [5].

Employers like PricewaterhouseCoopers offer student loan repayment assistance, and some extend the benefit to other debt like auto loans [6].

Budget Carefully

Before committing to an auto loan, develop a budget to ensure the monthly payments will be affordable. Be realistic about your other expenses like housing, food, and healthcare. Online budgeting tools like Mint can help .

If money is tight, reducing expenses in other areas may allow you to squeeze the car payment into your budget. But avoid auto loans that stretch your finances too thin.

Have a Repayment Cushion

Life happens, so it’s wise to leave some wiggle room in your budget to account for unexpected expenses. Having a repayment cushion means you can still afford your auto loan if you lose your job or have a medical emergency.

Financial experts recommend limiting auto loan payments to no more than 10-15% of your take home pay. Leaving extra room in your budget helps ensure you can repay your loan even during difficult circumstances.

Review Insurance Needs

When taking on an auto loan, it’s essential your vehicle is properly insured. Review your coverage for comprehensive and collision insurance, which pay for damage to your car. Also make sure your liability limits are sufficient in case you cause an accident that injures others.

Insurance requirements vary by lender, but you’ll generally need more than just state minimum coverage. Talk with your insurer to make sure you have the right auto policy before finalizing your loan.

Understand Cosigner Rules

If your credit isn’t strong enough to qualify for an auto loan on your own, you may need a cosigner with better credit to join the loan. This can help you get approved and secure a lower interest rate.

However, cosigners are equally responsible for repaying the debt. Make sure any cosigners review loan terms and are aware of the obligation they are taking on.

Consider a Secured Loan

Another option if you have poor credit but need a car is a secured auto loan. This requires you to pledge collateral, like a certificate of deposit (CD), to back the loan. Secured loans typically have lower interest rates than unsecured loans.

Just be aware that if you default, the lender may take your collateral. But this can help those with bad credit get an auto loan they can afford.

Know Your Credit Score

Your credit score plays a big role in whether you’ll qualify for an auto loan and what interest rate you’ll pay. So it’s important to review your credit reports from Equifax, Experian and TransUnion to understand your score before applying.

Online services like Credit Karma offer free credit scores and reports. Improving your credit can help you land better auto loan terms .

Clean Up Your Credit

If your credit score is marginal, take steps to improve it before applying for an auto loan. Pay down balances, dispute errors on your credit reports, and avoid new credit inquiries. It takes time, but cleaning up your credit can really pay off.

For more tips, check out NerdWallet’s guide on how to improve your credit score fast .

Consider an Older Used Car

While many people prefer to buy new vehicles, used cars tend to be significantly cheaper. Opting for an older used car with lower sticker price can help you avoid taking on excessive auto loan debt.

Cars over 5-6 years old also tend to have slower depreciation, so you won’t lose value as quickly. Just be sure to have a mechanic inspect any used car before purchasing.

Weigh Paying Cash

If you have sufficient savings, paying cash for a used car is another way to avoid auto loan debt altogether. Sure you may miss out on earning a bit of investment income, but you also won’t pay any interest costs.

Run the numbers to see if it makes sense to deplete your savings versus taking on a loan. Paying cash may be the smarter financial move.

Research Reliability

The make and model of car you select can impact your auto loan experience. Some brands and vehicles have much better reliability and lower maintenance costs than others.

Review sites like Consumer Reports and J.D. Power to find vehicles known for reliability. This helps minimize headaches and costly repairs down the road .

Mind the Mileage

When financing a used car, lenders often set maximum mileage limits on vehicles they will finance. This is because the value of a used car drops as mileage increases.

Typical mileage limits range from 80,000 – 150,000 miles. So if you need to finance an older used car, mileage caps may restrict your options.

Ask About Exceptions

If something comes up that will impact your ability to make payments, don’t hesitate to contact your auto lender. Many understand that exceptions come up and will work with you.

You may be able to defer a payment, change due dates, or modify your loan terms. It never hurts to call and explain your situation to see if they can help.

Refinance for Better Terms

If your credit improves after taking out an auto loan, you may be able to refinance for better terms. Those with excellent credit can often qualify for lower interest rates.

Refinancing can help you pay off your loan faster and save money on interest. Online lenders make it easy to compare refinance offers [3].

Pay More Than Minimum

Making payments larger than the monthly minimum due will allow you to pay off your auto loan faster and reduce interest costs. Even paying $20-50 extra can make a difference.

Review your budget to see if you can squeeze in a bit more towards your auto loan principal each month. Every extra bit helps.

Pay Bi-Weekly

Many lenders allow you to make bi-weekly payments instead of monthly payments. This equates to making one extra payment per year, since there are 52 weeks vs. 12 months.

Adding the extra yearly payment can shave months or years off the loan repayment period. Just be sure the extra cash flow works with your budget.

Make Payments On Time

Nothing hurts your credit score and loan terms faster than late payments. Set payment reminders and carefully review due dates to avoid issues.

If money is tight in a certain month, call your lender right away to discuss options. Late fees add up quickly, so stay on top of your payments. Even a single 30-day late payment can negatively impact your credit score[1][2].

If you do happen to make a late payment, get back on track as soon as possible. While the late payment will stay on your credit report for seven years, you can start rebuilding your credit score right away by consistently making on-time payments going forward[3][4].

It’s also wise to proactively communicate with lenders if you foresee an issue making upcoming payments. Many lenders are willing to work with borrowers by waiving late fees, creating payment plans, or modifying loan terms[5].

Setting payment reminders, budgeting carefully, and reaching out early can help you avoid the headaches and credit score damage caused by late auto loan payments.

Here are a few more tips for managing auto loan payments:

Enroll in Autopay

Sign up for autopay through your lender to have payments automatically deducted from your bank account each month. This ensures payments are always made on time, avoiding late fees and credit damage.

Pay Online

Even without autopay, making payments through your lender’s online portal allows you to pay anytime from anywhere. Set reminders to log in and pay before the due date.

Mail Payments Early

If mailing payments, allow 7-10 days for them to reach the lender. Mail at least 1 week before your due date to avoid issues with postal delays.

Consider Overnight Shipping

For last minute payments, overnight shipping services like FedEx can get your payment there on time. Just be aware of the shipping costs.

Notify Lender of Address Changes

If you move, immediately update your address with the lender. This ensures you receive billing statements and payment coupons on time each month.

Staying organized, planning ahead, and communicating with your lender can help you maintain an excellent payment history on your auto loan.