[08ChallengerDad]

(continued from top)

- Payments -

It’s important to keep your payments current, so don’t fall behind. Your credit rating depends on you keeping your word (and making payments as scheduled). Additionally, late payments often incur late fees (which vary with the lender). On the other hand, DON’T make the mistake of doubling up your payments (making two monthly payments each month) on an installment loan to pay it off early!

Installment Loans (such as car loans) are calculated on the amount being borrowed at a specific interest rate based on a specific length of time (term of the loan). Usually, a shorter term (fewer payments) will be calculated on a lower interest rate, saving you money – less interest paid on the same amount but borrowed for a shorter time. If you can afford to double-up your payments, you took out the loan with too long a term and are paying too much interest. Making two payments every month doesn’t save you any money….it makes more money for the bank.

Instead of making two payments a month, make the required one payment a month as scheduled and put the second payment into a savings account. The savings account PAYS you interest on your money. When you’ve made approximately **60% of the scheduled payments on the loan, call the bank for a “payoff or close-out balance” on the loan. The payoff balance has the interest discounted for early payoff. The bank will also provide you with a “per diem” amount. That’s the amount of interest “per day” that the loan is accumulating at that time. Each day that passes after obtaining the payoff balance requires the addition of one “per diem” amount to the payoff balance to close the loan. The amount you have in the savings account should roughly cover the payoff amount and you’ll save yourself the cost of several (on average, two or three) payments (providing you’ve put the second payment into the savings account each month) by paying it off early this way.

**The reason you need to make about 60% of the payments is because the banks load the majority of interest to the “front end” of the loan. The first payment on a car loan will primarily be applied to interest, while the last payment will be primarily applied to principle. This is why the dealership calls the bank for a payoff or closeout amount on a trade-in with an outstanding loan balance, rather than calculating the number of payments multiplied by the payment amount to figure what’s owed on the trade-in.

If you have the option to get a car loan with bi-weekly payments rather than monthly payments, you’ll save a substantial amount of money by paying every two weeks. While the payment amounts are roughly half of regular monthly payments, the increased frequency of making payments every 14 day as opposed to every 30 days will reduce your debt quicker because you’re reducing the principle quicker. Granted, on an auto loan, the amount saved isn’t enormous, but it’s proportionate in principle to the savings found by choosing a bi-weekly mortgage payment over monthly payments where a 30 year mortgage is paid off in roughly 23 years.

- Other Financing -

Typically, the best loan for the purchase of a new car is a “new car loan”, but there are other options:

If you’re financing a large amount for a costly car, a Home Equity Loan or Line of Credit might be worth considering. While the initial cost of getting such a loan is high with points and closing fees, the lower interest rate in addition to the tax deduction of interest over the life of the loan would more than offset the cost of the fees. But this is speculative since the government could yank that tax deduction at any time, as they gradually did over a few years with the interest on consumer debt some 20 years ago. The drawback here is that the collateral on the loan is your house (not the car) so a default could leave you homeless, not careless.

Credit Cards are NEVER an option since the interest rates are too high and too volatile. The bank can increase the interest rate on a whim, and there’s usually little you can do about it.

Leasing, while a viable option for someone who’s self employed or who owns a business and is looking for a tax deduction or place to reinvest capital, is rarely beneficial for individuals. You need to bring a down payment to the table, make payments for (usually) three years, and walk away with nothing more than the possibility of paying additional fees for excess mileage and damage to the vehicle. You still need to maintain and insure the vehicle as if it were yours, and if you want to keep it, need to go through the financing process (for a used car) all over again when the lease ends.

While I can’t reasonably cover every possible situation you might encounter, I hope this has helped at least a few people to save some money in financing their next car.

08ChallengerDad