A Small Change in Financing Terms Can Mean BIG Savings!
To get behind the wheel of the vehicle of your dreams, you need to arrange a few things first. First, you need a valid driver’s licence, then you need to settle on which car to buy. This will largely be determined by your budget, which means you need to know how much auto financing you qualify for when you start car shopping. If you are applying for financing with no credit, or your credit history is less than perfect, there may be a few extra hurdles to clear when qualifying for financing, but that doesn’t make it impossible. Before we get too far into explaining how adjusting the terms of a loan can save you money, let’s talk a little bit about the components of a car loan.
The Components of a Loan
There are a lot of terms tossed around when applying for auto financing. It is often assumed that everyone knows what all these terms mean, and people can feel too embarrassed to ask questions in the midst of negotiating financing. So, to clear things up, these are some of the components of a typical loan:
Principal: This is the amount of money borrowed for the loan, i.e., the amount of the car purchase including taxes and any other associated fees. Each month when you make a payment, some of it will be used to pay the interest and some of it will be used to pay down the principal.
Interest Rate: An annual percentage of the principal that will be paid along with the repayment of the loan. For example, if your loan principal is $10,000 and the interest rate is 30%, the annual amount of interest will be $3,000.
Financing Term: The financing term, or simply the term, is the length of time you have to pay off the loan. For cars, the term will generally range anywhere from one to seven years. This depends on the size of the loan and how much you’re able to pay.
Down Payment: The down payment is how much you have to put towards your car. If you have pre-qualified for an $8,000 loan for a used car, and you have $2,000 saved on your own, you can afford to buy a $10,000 car.
Both the principal amount and the interest rate you can qualify for will be affected by your credit rating. If you do have a history of past credit problems, you may not have as many options on financing terms as those who have a good credit history. But don’t despair! Your credit is something that Auto Loan Solutions can help you improve with time, and one of the best ways to help rebuild your credit is an auto loan.
How Does Understanding How Financing Works Save Money?
Just because you’ve been saddled with bad credit, and don’t have as many options as those with good credit, doesn’t mean that there aren’t any tricks out there that can help save you money. For example, it’s true that there is no budging in setting both the interest rate and the principal amount. The monthly amount to pay that principal at that interest rate is just a fact of life. HOWEVER, you can change the payment frequency, which can make it easier to make it to the end of the month without struggling, and can help you pay off your loan even faster than planned.
How does THAT work, you ask? Let’s say your car loan payment is $300 a month. You have run the numbers and can afford your car payment, your insurance and your maintenance costs, and you’re ready to sign on the dotted line. However, you know you get paid every two weeks, and taking that whole payment out of one cheque is going to be hard to swing. You could take half the payment and set it aside… OR, you could change your payment frequency to bi-weekly. It makes your life easier by helping you stick to your household budget, but better still, you make a whole extra payment every year, thus paying off your loan faster. There are 12 months in a year, but there are 26 bi-weekly pay periods, so you’re paying one extra month without breaking a sweat. How great is that?
A Little Something Extra
Another way to save money over the term of your car loan is to increase your payment amount, even by just a little bit, if you can. Let’s say you qualified for your auto financing this week (and yes, it really can happen that quickly!) and you determine that a $300 loan payment is something you can comfortably afford.
But then your annual review period at work comes up in June, and congratulations, you’re getting a raise! Now you have a little more wiggle room in your budget, and you have determined that you can afford to up your monthly payment to $350 without any financial hardship. You can shorten the duration of your car loan, because that extra $50 every month is the same as making TWO extra payments every year. Of course you need to double check this in your financing agreement, but if it’s permitted, it’s a great way to lower your overall cost of vehicle ownership.
Personal finance and car loan terms seem like they’re very complicated and it’s easy to get overwhelmed. If you have been hesitant to make the leap into vehicle ownership because you feel intimidated by the auto financing process, we can help. Auto Loan Solutions has been helping people get behind the wheel of the right vehicle for their needs since 1959. It all starts with filling out an easy online loan application form.
Do you know someone who could benefit from learning a little more about personal finance? Please share this post with them one Facebook. While you’re there, be sure to like our page. We regularly share updates on improving credit and tips to make car ownership more affordable.