This post is the second in the series Buying a Car With Bad Credit, discussing how to save money on a loan with a high interest rate. If you do not already have an auto loan, read the first post in the series: Securing an Auto Loan.
Subprime buyers, or consumers with low credit scores, often face auto loans with starting interest rates as high as 14%. A low credit score makes lenders nervous, so they will charge higher rates to ensure they make money from the transaction. If you’re reading this article, you probably already know this because you probably already have an auto loan with a high interest rate. Luckily for you, we’ve got some helpful tips on how to save money on that auto loan or, at the very least, to avoid watching your credit score tank as the fees start to pile up.
1. Pay on-time and cut costs elsewhere
If you stay on top of your auto loan payments, you’ll avoid late fees AND you’ll see your credit score start to go up. Don’t be afraid to cut costs elsewhere either: watch the thermostat, shop at Aldi or Walmart instead of Whole Foods, keep a budget, and consider switching to a credit card with a lower interest rate. Additionally, if you can afford to pay more than the minimum on your installment, do it! This will help decrease your overall payment period, and give you more time to focus on paying off the other loans and debts which are potentially hurting your score.
Of course, make sure you’re paying all your other bills on-time as well, and not just your auto loan; though missing loan and credit card payments will do the most damage to your credit score, falling short for rent could shave a few points off when you can least afford to see your score drop. A better credit score is the best way to avoid high interest auto or mortgage loans going forward!
2. Consider refinancing
If you focus on paying off your debt in a responsible fashion and see your credit score start to climb up, you may be eligible for refinancing. Talk to your lender about your options if you see a significantly positive shift in your score, and you could potentially see your interest rate drop to a reasonable level. Of course, the only way you can expect to be eligible for refinancing is if you build up your credit first, which can take over a year. Making your payments on time, using a secured credit card, and managing your money wisely are some of the best ways to build credit; the key is to start right away!
3. Use your tax refunds wisely
An extra thousand dollars from tax refunds can make a big dent in your debt if you spend it wisely. Parse out the money and budget it: which loans require the most money each month? Each year? Which do I have the most trouble paying off? Your high interest auto loan will probably fall under all three of these categories, so don’t be afraid to apply your extra money to focusing on that one loan if need be.
4. Be Patient
Auto loans with high interest rates are tricky beasts indeed, but they’re not impossible to overcome. As long as you are conscientious with your money and installment payments, know how to build credit and where to shave off expenses, you can pay off that loan quickly and efficiently. Remember that loan payments are only a temporary nuisance, and though three to five years may seem like a long time in the first few months, they’ll soon be behind you!