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Saving money on an auto loan involves some shopping and careful research. Here are some tips that you might find helpful:
Consider using your home equity
Tapping your home equity may substantially cut your car loan interest payments. Using a home equity line of credit (HELOC) or a home equity loan will give much lower rates than traditional car loans because they use the value of your home for securing the loan. The home-equity credit interest is generally tax deductible if you follow some procedures. Make sure to consult with your tax advisor on your particular situation.
If comparing the options, a HELOC is more appealing in terms of the initial interest rate, which is rather low, but it has a variable rate is, which has certain risks, especially in the current economical situation. Because of this, HELOC is usually considered for car loans of 36 months or less. For loans of greater periods of time, a home equity loan with a guaranteed fixed rate may be a much better choice.
Although, you have to understand the importance of securing your vehicle loan against your home and all the risks involved in this situation. Because your home is used as a collateral, you have to be disciplined payment-wise and make everything on time or you'll end up on the street with no house.
Use independent financing
Using an independent lender for financing before you consider car loans can also save you some money. Financing through dealers is usually more expensive than bank car loans, regarding your credit rating. In some cases th car loan will give more revenue to the dealer than the car sale itself.
Many dealers will ask you what monthly payment can you afford, and then raise the payment to that exact amount. The loan could be sold to a lending institution by the dealer, which will receive a commission based on the difference between your interest and the bank's rates. This may cost you a lot of money. For example, in case of a $20,000, 48-month auto loan, the difference between a 7 and 9 percent interest rate is more than $900 over the whole term of the loan.
Beware of zero interest loans
No interest auto loans may sound very attractive, but be careful and do a research on all the details of such a loan, especially rebates. Let’s consider a case when you are buying a car from a dealer for $16,000 and pay zero interest for 36 months, or can receive a $2,000 rebate. The monthly payment in case of zero interest will be $444.44. However, if you consider the rebate and use a bank auto loan with 5 percent interest, your monthly payment will be $419.59. You're saving $24.85 a month, or $894.60 in total.
Credit score is important
Before considering any loan, make sure to get all the information on your credit report and score, and correct inaccuracies if there are any. Also, you may consider reducing some risk factors that may affect your credit rating, such as unpaid credit card bills, before buying a car. Your credit score is used by the lenders for determining the rates on your loan. Consequently, a better credit rating will give you a chance to get lower rates on your car loan.
Think about leasing
Leasing as a form of financing a new car became popular in the 1990s and is popular among those who cannot afford buying the car outright. In case of leasing the monthly payments are usually lower compared to auto loans, because you aren't paying the whole price for the car. You can have a $200 monthly payment for a new car. On the other hand, you have no resale value after the lease expires.
Like with any financial service, shop around to get the best offer. Pay attention to all the details and the of the lease, especially whether the monthly payment includes sales tax and fees or not. Also, make sure you aren't paying a larger down payment to get the lower lease rate.
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