Automobiles are one of the largest purchases that most people make, second only to buying a home. The price of most vehicles is also increasing in many areas, which means that it’s getting harder to purchase a car without getting a loan.
When you’re borrowing money to buy a car, it makes sense that you would want to pay as little as possible each month. If you have a large car payment, that leaves less money every month to pay for the rest of your expenses.
If you’d like to know how to get lower payments on a car loan, a good place to look first is your credit score. Lenders use your credit score to determine how risky it is to lend to you. A higher score means lower risk, and that means you’ll pay lower interest rates. As a result, you’ll have smaller car loan payments.
II. Understand Car Loan Dynamics
When you’re trying to see how to get lower payments on a car loan, you’ll want to make sure you understand everything about how car loans work.
When you finance a car, you have to pay interest on the loan. With most auto loans, you pay interest based on the amount remaining on your loan. Part of your monthly car payment goes towards the principal (the actual amount you borrowed), and part goes toward interest charges.
Most loans are front-loaded, which means a larger portion of your payment goes towards interest at the beginning of the loan period while more applies to the principal toward the end of the loan term. This is known as “amortization.”
Each loan has its own term length. In general, if you opt for a longer term length, each payment may be lower. However, you’ll also pay more interest over time, which means you’ll likely spend more money on the vehicle in total.
Monthly payments are determined by the price of the vehicle, the amount of your down payment, whether the car is new or used, and the interest rate. Generally, interest rates are higher on used cars. You will also pay a higher interest rate if you have poor credit or no credit.
III. Importance of Building Credit
Having good credit is crucial to getting a car loan and reducing the amount of interest you’ll pay.
Your credit score is calculated based on the information in your credit report. Your credit report lists details about any past loans you have taken out, including how much credit you have available, how often you make payments, and whether you have missed any payments or made them late.
The information is used to generate a three-digit number, typically between 300 and 850, with higher being better. This is your credit score. Lenders look at your credit score before approving a loan application to determine their risk of lending to you. Applicants with higher scores are considered less risky. This means they’ll be more likely to be approved for loans and will receive lower interest rates on those loans.
If you have a high credit score, you can expect lower auto loan payments. Since each payment is made up of an interest portion and a principal portion, a lower interest rate will reduce your total monthly loan payments as well.
IV. Practical Steps to Build Credit
If you want to know how to get lower payments on a car loan, you’ll want to understand how to improve your credit score. That’s because lenders look at your credit when deciding whether to give you a loan in the first place. If you have good credit, not only is it more likely that you’ll get the loan, but you’ll also probably pay a lower interest rate, which means your payments will be lower as well.
Here are steps you can take to build your credit:
A. Start Early
- Credit takes time to build. Lenders want to see that you make payments on time, and that you are able to do this for an extended period. The sooner you start working on your credit score, the better.
- The length of your credit history matters. For instance, if you’ve had a credit card for ten years and never missed a payment, this will improve your score more than if you’ve only had the card for five years.
B. Pay Bills On Time
- One of the most important factors used to calculate your credit score is how often you make payments on time. Even missing a single payment can be detrimental to your credit score and make it more difficult for you to get an affordable loan.
C. Maintain Low Credit Card Balances
- If you are using nearly all of the credit you have available, lenders may think that you are struggling to make ends meet and relying on credit to pay your bills. In general, it’s typically considered best for your credit score to only use around 30% of your available credit.
- For example, if you have two credit cards and each one has a $5,000 limit, you have $10,000 of available credit. Therefore, you should aim to have less than $3,000 of this available credit (30%) outstanding at any given time.
D. Limit New Credit Inquiries
- When you apply for new credit, the lender will make an inquiry into your credit score. This is known as a “hard inquiry” and it is noted in your credit report.
- If you’ve applied for several credit accounts in a short period, this could be seen as though you are having trouble affording your expenses and looking for loans to help you. Therefore, your credit score will take a temporary hit each time you apply for new credit. Only apply for credit when you need it and try to limit the number of inquiries whenever possible.
E. Diversify Types of Credit
- Having a different mix of credit types (credit cards, mortgages, student loans, car loans, etc.) can actually give your credit score a boost. That’s because it shows lenders that you can responsibly manage several different kinds of loans.
F. Address Mistakes on Credit Report
- Credit reports can have mistakes. This is why it’s important to know what’s listed in your credit report. Errors can include anything from misspelled names to incorrectly reported accounts and even situations where your information was incorrectly merged with someone else’s details!
- You can get a copy of your credit for free each year from the three major credit bureaus in the United States (Experian, Equifax, and Transunion). If you notice any errors in your report, you should contact the bureau and explain the error. You may be asked to provide proof to support your claims.
V. Credit Builder Loans: A Deep Dive
A problem for many people who don’t have much (or any) credit history is they find themselves unable to build credit. This is because it’s difficult for someone with no credit to get a loan.
If you don’t have a lengthy history of paying back loans on time, lenders may be reluctant to lend to you, and that means you can’t show that you can pay a loan back on time.
A potential solution to this problem comes in the form of credit builder loans.
A. What are Credit Builder Loans?
- Credit builder loans are specifically designed to help people who have no credit or poor credit. They work differently from most traditional loans because you aren’t able to access the loan amount until you have made all the required payments plus interest.
- Once you’ve made the payments as outlined by the terms of the loan, you receive the loan amount.
B. How They Work
- Since you cannot access the loan amount until you’ve made all the payments, there is very little risk to the lender. This means that, in most cases, the lender won’t even do a credit check during the approval process.
- This can be very helpful because it allows people who have poor credit or no credit to get a loan and use this loan to improve their credit score.
- As you make payments on the credit builder loan, these payments are reported to the credit bureaus. Over time, this will improve your credit score.
- Credit builder loans allow you to build a credit history. This is crucial since your credit history is one of the most important factors used to determine your credit score.
- However, you’ll need to make sure that you make your payments on time. While it takes time to build a positive credit history, even a single missed payment can set you back.
D. Where to Find Them
- Credit builder loans tend to be widely available, since they involve very little risk to lenders. You can typically find these loans at banks, credit unions, online lenders, and some other financial institutions.
- However, not all credit builder loans are the same. Each will have its own interest rate, terms, and payment schedules. Therefore, it’s important to understand the particulars of the loan before you apply.
E. Tips for Successful Use
- One of the most important things you can do when using a credit builder loan to improve your credit score is to make payments on time. Since the goal of these loans is to help you establish your credit history, timely payments are crucial.
- You’ll also need to make sure that the lender reports your payments to the three major credit bureaus ((Experian, Equifax, and Transunion) as these bureaus are responsible for compiling credit reports.
VI. Additional Strategies for Lower Car Loan Payments
Improving your credit score isn’t the only way to lower your car loan payments. There are several other strategies you can use to reduce your payments and get a better deal, including:
A. Down Payments
- If you put down a larger down payment on a vehicle, this will reduce the amount you need to borrow which will in turn lower your monthly payments.
- You’ll also end up paying less interest since you’ll be paying interest on a smaller principal amount.
B. Shop Around
- There are several different ways to get a car loan. You can get your loan from the manufacturer, the dealer, or various other lenders. Each lender will offer different terms, payment schedules, and interest rates. Ask around and see what rates are available to get the best deal, and don’t forget to inquire about any administration or delivery fees, early payment penalties or other hidden charges.
- Just because a lender posts a certain rate doesn’t mean you can’t get a better deal.
- Not only can you try to negotiate on the interest rate, but you may be able to reduce the overall price of the car too, which will of course lower your monthly payments.
- If you’re currently paying a high interest rate on a car loan, you may be able to refinance that loan once you’ve built your credit history and improved your credit score.
- However, there will likely be a fee associated with doing this, so you’ll want to make sure that you’re saving more money with lower monthly payments than you’re spending on the fee.
E. Choose Longer Loan Terms
- Car loan payments are spread out evenly over the term of the loan. Therefore, if you choose a longer repayment term, each individual payment will be smaller.
- However, you will also pay more interest over the course of the loan, so you will need to decide whether you want a lower monthly payment or if you want to pay off the vehicle more quickly and spend less overall.
- In addition, vehicles have a limited lifespan and they depreciate over time. If you take a long time to pay off your car, you could end up owing more than the vehicle is worth before you’ve made all the payments.
When you’re trying to get a loan, whether for a car purchase or otherwise, your credit score matters. Therefore, it’s important to understand what improves your score and take steps to build a strong credit history. It’s also important to monitor your credit standing and maintain it. There are several credit monitoring services out there. Finding the one that provides the options you need will help you stay on top of your credit situation.
By being aware of your credit score and taking the right steps to improve and maintain your score, you’ll put yourself in a position to pay less on your next automobile loan, and you’ll be setting yourself up for future financial flexibility.
VIII. References and Additional Resources
If you want to learn more about how to get lower payments on a car loan, there are several resources available including:
- “How to Improve Your Credit Score” [Equifax.com]
- “Understand, get, and improve your credit score” [USA.gov]
- “How to Lower Your Car Payment and Save Money” [Car and Driver]
- “Auto loan delinquencies are rising. Here’s what to do if you’re struggling with payments” [CNBC]
Credit Builder Loans Company Reviews
Recently Updated Articles