Car Loans

To save money on car loans, a prospective car buyer has to know how auto loans work, including attention to auto loan terms, loan fees, and other aspects that will help reduce the amount of money the borrower will pay.

The first part of saving money on car loans is getting the interest rates for the loan as low as possible. That is because the interest will be compounded for the entire term of the loan, whether it is for 12 months or 6 years.

There are several ways to keep interest rates low on car loans. One is to have good credit. Those with stellar credit can command lower rates from lenders. If you don't have established credit, the easiest way to get a good credit history is to get a credit card and pay it off. However, this is easier said than done, so different consumers experiment with building good credit in various ways. Paying off your first auto loan on time will, ironically, get you a better credit score for the next loan.

If a driver has bad credit, the process becomes a little more difficult. Lenders will want to charge higher interest rates. But there are still options for bypassing what some call the "credit crunch", when a past credit history is making a consumer a loan risk (on paper) and driving loan fees sky-high. One options is to get a co-signer who has good credit to sign as a party to the loan. However, this person could be negatively affected if the borrower does not pay. Also, some dealerships can arrange for the co-signer to own the vehicle and not the borrower, which can complicate matters.

Another way to deal with a bad deal on interest rates and reduce charges for a car loan is to get an informal loan from someone else, such as a family member. However, this is not often a good way to save money, as an informal lender may feel entitled to their "just reward" or in other words, the interest rates that formal lenders would charge.

The second half of saving money on an auto loan is what consumers could call "front-loading" a loan. Essentially, this means throwing all of an individual's assets, as well as cash, at an auto loan to drive down the amount that the borrower will be paying.

First, a buyer can amass as much of a down payment as possible before buying. This is important, because the down payment is an amount that will never accrue interest at all.

Second, a buyer can select a short term for payments. As long as the car buyer can handle the high payments, he or she will be paying the car off faster, and hence, paying less.

These principles will help consumers pay a lot less on auto loans, and everything from yard sales to home equity situations can help a buyer come up with that extra up-front payment. The trick is to remember that although the initial costs can seem high, when the vehicle has reached pay-off point, the driver, who owns it free and clear, is on the path to saving again.

All of these options should be considered within the context of a budget. The danger is that a buyer can easily be swamped if they do not keep back some savings when taking out an auto loan. That's why the above strategies are only part of the solution, but with attention to the bottom line of a car loan deal, drivers can be sure they will be paying what they are comfortable with.