Buying a car can be a lot of fun, especially after you have signed all of the papers and taken the car home. However, those loan papers that you signed now mean that the car technically belongs to the bank until you’re done paying off that 36, 60, or 72-month loan. Fortunately, handling that car loan isn’t as daunting as it may seem. Here are a few tips and tricks for managing it.
Manage your car loan by creating a budget
Your car loan will have a set payment amount each month, so the first step in managing correctly is to see how it fits into your monthly budget. The folks at How Stuff Works recommends writing down all of your monthly expenditures – rent/mortgage payment, utilities, food costs, etc. – and see how they weigh against your auto loan. Ideally, your auto loan payment should be a comfortable amount that you can safely afford every month or about 8% of your monthly income.
Set up an autopay function with the lender
After you have figured out your budget and know when your auto loan payment needs to be paid, now it’s time to pay it. The best way to take care of it, so that you never really have to worry about it, is to set up an automatic payment schedule with the bank or credit union that you received the loan from.
By knowing what day of the month that payment will be taken out of your bank account, you’ll be able to ensure that you have enough money in that account to pay the loan. Just set it and (kind of) forget it!
Pay more than the minimum payment every month
Since you budget your monthly income and have auto payment set up, one trick to paying off the loan faster is to pay more than the minimum monthly payment. When you first get the loan, the pre-determined monthly payments are technically the lowest amount that you need to pay to satisfy the loan by the end of the term. However, there is no pre-payment penalty on simple-interest loans, which means that you can always pay more than that amount of pay the loan off sooner.
In fact, just paying an extra $20 or $50 every month can greatly reduce the length of the loan over time, which means that you will own your new pride and joy much sooner.
Refinance your auto loan
If you received your auto loan from a dealership, then there’s a chance that you may be paying a high-interest rate and thus have a high monthly payment. The good news is that after a few months, you can refinance your auto loan with your personal bank or credit union. By doing so, if your credit is in good standing, then you may be able to receive a lower rate and lower your monthly payment to make the loan more manageable.
Defaulting on the loan
In the event that you can no longer pay your auto loan – due to job loss, divorce, etc. – then you may need to default on it. In this case, the car will typically be repossessed by the lender and you’ll be responsible for the remainder of the loan plus any storage fees. If you can pay those fees, then you’ll get the car back.
However, if you can’t, then the car will be auctioned off to pay the balance, but if the amount that it’s sold for doesn’t cover it, then you’ll be responsible for the remainder of the balance. There is also the chance of voluntarily repossessing the car, which is when you take the car to the lender yourself in order to circumvent having it professionally repossessed. You’ll still be responsible for the remaining amount on the loan in that case.
An auto loan might seem daunting, but management is key
While being responsible for an auto loan might seem daunting at first, that apprehension can be mitigated with proper budgeting and refinancing (if needed). With everything properly set up and budgeted, you can comfortably enjoy your car without having to worry about making the monthly payments on time every month.