How to Reduce Finance Charges on a Car Loan

Most people can't afford to purchase a car with cash but instead have to take out a loan. You can cut the costs on your loan by taking some steps to reduce the finance charges. Here are a few tips on how to do this.

Difficulty: Moderate

Instructions

1. Pay extra payments on your car loan. You will reduce the outstanding principal balance. Finance and interest charges are accrued based on the outstanding principal. The faster you reduce your principal, the quicker you reduce your interest charges. The goal is to reduce the principal to lower the base for your finance charges.

2. Send car loan payments early. If you can't make an extra payment, try sending your car payment early. If your car note due date is the 15th of the month, and you pay on the 1st, you've successfully knocked down 14 days of accrued interest. That means a little more of your payment goes to the principal.

3. Pay your car loan payments on time. If you can't send your loan payment early, at the very least send it in on time. You will not only help your credit score, you will avoid late payment penalties.

4. Don't miss a payment. If you miss a payment, you will be assessed a late payment charge. Too many missed payments will affect your credit score.

5. Get a copy of your FICO score. Your FICO score is the same as your credit score. If your FICO score is high, you will get a lower interest rate. If you find that over the period of your car loan, your credit score increases, you might want to refinance the outstanding balance. Look for a loan with a lower interest rate that reflects your higher credit score.

Tips & Warnings

• If you have good credit, apply for a loan through a credit union. Try to avoid financing a car through a dealership. Dealerships tend to charge a higher interest rate.

[Ravynnelyn]

on 5/9/2008 sorry, I meant to write at the rate of $3.26 a day.

[Ravynnelyn]

on 5/9/2008 I paid ahead on my car until July of this year..one late payment for the last three years and that was a year and a half ago. I called for a payoff quote and they are charging me $1300 accrued interest at the rate of $3.26 ahead. Is this legal? Paying ahead, as you suggest in Step 2, did nothing but apparently cost me MORE money.