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.
About the author: Tony Reed is the author of " How to save money on your car loans", please visit his website Auto Loans & Mortgages for more information.
