How to reduce your car loan repayments
There are many ways to finance the purchase of your next car – some are smart while others offer less favourable terms to the new or naive buyer.
Here is one of the smartest ways to handle your car loan – leaving you with smaller repayments and less interest to pay.
Request a ‘balloon’ payment
When buying a car, you have the ability to ask for a balloon payment at the end of your car loan. For example, if you buy a car worth $20,000 – you can finance $15,000 and request a final payment of $5,000 which is called the balloon. This final $5,000 is not part of your finance. You do not pay interest on it. There are normally rules as to how big of a balloon you can have, though you can quickly see the benefits in financing only a part of the car instead of the full amount.
Lower borrowed balance means smaller repayments
Now because you have added a balloon to your finances, your repayment levels will decrease due to having borrowed less than the original price (if you keep the same number of years on your loan).
This means you can save the extra money towards your balloon repayment that is approaching at the end of your loan. Alternatively it frees up equity for you to invest or otherwise use in a more productive way than just servicing interest on your car loan. You could set up an automatic savings plan
with a high interest online account. that way you'll not only save money for the balloon payment easily, but also get paid interest on your savings, which will get you to your savings goal faster.
The less you owe, the less your interest will be
As you can imagine, the interest you pay is correlated towards how much you borrow. By having a balloon at the end of your car loan you will pay less interest. A nice perk considering you still get the car you want but just with a different form of pay out at the end.
The one important thing to remember
Although it seems great to have lower repayments and less interest, there is one catch that often stings people in this kind of car loan. They fail to actively save money over the course of the loan, leaving them with no money to fund the balloon repayment at the end of the loan.
Some people also rely on selling the car to pay off the balloon. This can be disastrous as the final payment will be due and you are then forced to rush the sale of the car.
However, if used properly – a balloon on your car loan will enable you to borrow less, save on interest and use your money in ways that will help offset the depreciating asset that is a car.
To find the lowest rate car loans in the market look no further than Moneyhound.com.au
Source: Alex Wilson, writer for Savings Guide