When you finance a car with poor credit, you get an interest rate that is higher than average. Therefore, paying off your loan faster can lead to big savings. We've got some tips on how you can accomplish this as well as some other ways you can save money on your bad credit auto loan.
Before Signing a Contract
If you have a budget you need to stick to, you have several things to consider before taking out a loan. These tips can help you start off on the right foot and set you up for success.
- Got Time? Work to Improve your Credit
If your vehicle needs aren't urgent, try improving your credit score before applying. You can pay down high credit card balances, get current on any late payments, or look for errors or inaccuracies to dispute on your credit reports. A higher credit score will help you land a better interest rate.
- Make a Down Payment
Every cent that you are able to put down will reduce the amount of the loan. Therefore, a down payment will help you lower the total cost of the loan by lowering the principal and reducing interest charges. It also helps if you pay all taxes and fees upfront instead of rolling them into the loan.
- Shorten the Loan Term
A long car loan and a higher interest rate is a bad combination. If you extend a car loan to lower the monthly payment amount, you are only making the total cost much more expensive in the long run due to interest charges. If you want to save money on your bad credit auto loan, it is important that you keep the loan term as short as you can.
- Make Sure It Uses Simple Interest
Before signing anything, you need to make sure that the loan uses a simple interest structure. Simple interest car loans never have penalties for paying them off early. Also, borrowers can take advantage of how they work to further save money.
Saving Tips During the Loan
Once you have taken out a bad credit car loan, there are still ways you can save money. You can take advantage of how simple interest car loans work to save costs with these tips.
- Avoid Late Payments at All Costs
Not only can a late payment hurt your credit, but it will also increase interest charges. Interest is computed on a daily basis based on the outstanding balance of the loan on simple interest loans. If you miss a payment, more interest will accrue based on the principal balance. Since you end up paying less in interest with every payment as more of your payment gets applied to the principal, make sure you are never late.
- Pay More When You Can
The quicker you pay off the loan, the less in interest charges you end up paying. If your finances allow you to, pay more than the monthly payment amount when you can. Make sure that you designate any extra money as an additional principal payment. You could round up your payment every month and even pay a lump sum when you get your tax refund or run into an unexpected amount of cash.
- Pay Half of Your Payment Every Two Weeks
"Payment splitting" can lead to interest savings as well. With it, you pay half of your monthly payment early, and the other half on or near the due date. Why? Every time you lower the principal, it reduces the interest charges that accumulate from there on out. Payment splitting reduces the daily interest charges that accumulate between the two installments. Done over time, this can lead to big savings on your interest expense.
You might be surprised to learn how much you can save yourself by using these tactics.
Helping You Get Approved
It's nice to have a plan of attack before taking out a loan, especially one that helps you save money. However, often the hardest part of taking out a bad credit auto loan is finding a dealership that can help.
At Drivers Lane, we connect credit-challenged consumers to a dealership in their area that stands to give them their best shot at an approval. The lenders they work with sometimes even offer loans with little to no money down.
We can help if you simply complete our secure and easy online application. Applying is free and puts you under no obligation, so you have nothing to lose. Start today!