Do you want to save money on your next car loan? Sure, you do. Now, here are some of the options and tips that you can do before you go shopping for cars:

Home Equity

To lower your car’s interest rates, you can take advantage of your abode through home equity. There are two choices here. The first one is the home equity line of credit or HELOC and then the home equity loan. Both of which will surely lend a helping hand into your goal of minimizing the interest payments for your car when compared to the standard car loans. They work efficiently since they are held against your home’s value. For the home equity credit, the interest is oftentimes tax deductible if you document it on your federal tax return.

Now let us compare those two choices. If you want the lowest initial rate, a HELOC will work for you. However, bear in mind that the rates here are variable, which means that there are possibilities that the payments will increase without prior notice. Usually, this is only good for car loans that are not more than 36 months. Otherwise, it is best that you go for a home equity loan since this has a fixed rate for the entire term. Whatever you will select here, you should understand that it is required that you have to be disciplined enough to make the payments on time or else, you may end up selling your home.

Independent Financing

Now, before you go shopping for cars, go to an independent lender where you can obtain financing. This can help you get more savings because dealer financing is much more expensive in contrast to car loans through banks. Think about it: there are several times that a car dealer makes even more money with the financing than the actual sale of the car. Dealers typically ask you how much you can afford for the car’s monthly payment. Now this gives them the opportunity to hike up the interest for that certain monthly payment point. Later, they will only sell the loan to an institution so that they will receive a commission derived from the difference of the interest rates and the regular amount that the bank charges. This will only mean more expenses for you. For instance, your car loan of 48 months is 20,000 dollars, the difference between the normal 7% interest from the bank and the dealer’s interest of 9% is more than 900 dollars over the loan term.

Watch out for Zero Interest Loans

Although they can be deceiving at times, be careful in dealing with zero interest loans because they may not be the best choice for you especially when you will lose a large rebate along the process. Take for example this instance where you will buy a 16,000 dollar car and you can pay that amount for 36 months without interest or you will receive a 2,000 dollar rebate. Now, every month you have to pay about 444 dollars but if you compare this with financing through the bank at 5%, it will only cost you around 419 dollars. That saves you more than 24 dollars every moth of for more than three years, that’s 894.60 dollars.

Credit Score Check

This should be done before you go shopping for any type of loan. Doing so will help you correct the inaccuracies in your credit score and report so as not to affect your credit rating. It will also be useful if you remove all the risk factors like overdue credit card bills. Most lenders base the interest rates on your credit score so improve your credit for lower loan rates.

Leasing

This method became a trend in the 1990s which allows people to purchase a new car through paying monthly. This is typically lower than loan monthly payments. Actually, you can lease a new car for only 200 dollars or even less. However, there is no resale value after the expiration of the lease. There are lease specials that are being advertised for you to have the best deal. Cash in on them but ensure that you have read the terms and conditions such as whether these include fees and taxes. Consider paying a large initial down payment so that the lease rate will be lowered securely.

Annual Percentage Rate (APR): The yearly cost of a loan to the borrower. It’s similar to the interest rate. However, it also includes other charges and fees so as to reflect the total cost of the loan.

Captive Finance Company: A finance company that is separate from a dealership but is owned by the same parent company in order to provide financing for the dealer’s customers. There may be incentives offered to use this company for your car loan.

Dealer charges: What the dealership charges for extras such as an extended warranty.

Dealer holdback: An allowance that the manufacturer gives to the dealer. It is usually between 2 and 3 percent of the manufacturer’s suggested retail price (MSRP) and allows the dealer to sell the vehicle at cost but still receive a small profit from the manufacturer.

Dealer invoice: The amount that a dealer is billed from the manufacturer for the car.

Destination charge: The fee charged for shipping, freight, or delivery of a vehicle to the dealer from the manufacturer or port of entry. This charge is passed on to the buyer without any markup.

Factory-to-dealer incentive: A discount or rebate offered by a manufacturer to move slow-selling cars or excessive inventories.

Manufacturer Suggested Retail Price (MSRP): A manufacturer’s recommended selling price for a vehicle and its options.

Mark-up: The amount of profit that a dealer makes on a car. It is the selling price subtracted from the dealer invoice.

Monroney Sticker Price: The sticker on the car’s window listing its base price, manufacturer’s installed options, manufacturer’s suggested retail price, destination charge and fuel economy.

Sticker price: The same as the MSRP.

These loans can lower your payments significantly, however, they carry their own set of risks:

• They may carry a higher interest rate than a shorter-term loan.
• While you pay less money each month, more of each payment consists of interest.
• Since you’re making payments for a longer period, you’ll pay significantly more interest over the life of the loan. For example, with a simple 72-month loan of $20,000 at 6.75 percent, you’d pay a total of $4,378 interest, compared with $2,545 for a 48-month loan at 6 percent.
• While you’re paying more interest each month, you’re also paying back less of the loan principal. This increases the chance that your loan will become “upside down” — meaning you could end up owing more on the vehicle than it’s worth.

It’s common to owe more than a car is worth in the first two years of a car loan, since the value of a new car drops quickly during that period. But with a long-term loan, you can stay upside down for a long time, as the car’s value declines faster than your equity increases. And you could end up rolling that unpaid amount into the financing for your next car, increasing your chances of getting upside down again.

So, before you take out a longer-term loan, consider the following ways to lower your monthly car payments without raising your long-term costs.

Get pre-qualified: It’s a good idea to get pre-qualified for an auto loan before going to an auto dealer. You may get a better interest rate and lower monthly payments than those offered by the dealer.

Consider a home equity loan: A home equity loan may allow you to borrow money at a lower interest rate than a standard auto loan and, since the loan is secured by your home, the interest may be tax-deductible (consult with your tax advisor).

Check the numbers: Be sure to find out the true long-term cost of the loan before you commit yourself. First, check the annual percentage rate (APR). That’s the interest rate plus all lender fees and charges, and it reflects the true rate you’ll pay. Next, ask the lender for the total cost — the sum of all the monthly payments you’ll make during the life of the loan, plus all fees and charges. Compare this with the amount you’d pay on a shorter-term loan.

Read the fine print: As with any car loan, be sure to check all the fees and conditions on the purchase. Are there large financing fees, or a requirement for credit insurance? Most importantly, are there penalties for prepaying the principal during the life of the loan that could prevent you from refinancing or increasing your payments to boost your equity?

Increase your down payment: Making a small down payment — say, only 5 percent — increases the cost of a longer-term loan. Cutting back other expenses to boost your down payment to 20 percent or more can save you a lot of money, and may allow you to take out a shorter-term loan.

Buy what you can afford: If you’re tempted to take out a longer-term loan, it could be because you can’t really afford the car you’re buying. You’d be far better off financially to buy a more modest vehicle you can pay off in five years or less.