How to Save on Vehicle Finance
You may need a car loan to finance your vehicle, whether new or a used. If you understand how these car loans work, you can make informed decisions, have peace of mind and ultimately save money.
The type of loan most people use to finance a vehicle is called a Simple Interest Loan.
A Simple Interest Loan is what most financial institutions use to finance consumer’s vehicle purchase.
An important note for parents helping their children purchase a vehicle: teach your children about the loan payment process and the importance of making the payments on time all the time.
Many young adults get lost in the excitement of a new vehicle without understanding the expectations of the loan. This lack of understanding causes long-term negative effects financially, particularly with their credit score.
When you borrow money from a financial institution to finance your vehicle, that money is called Principal.
The cost for borrowing money is called Interest. You must pay both the principal and the interest in full by the agreed upon end date of the loan. Payments happen through fixed monthly payments.
When you first start making your monthly payments, a higher percentage of the payment will go toward interest and the difference will go to the principal balance.
However, if you make the full scheduled on-time payments every month, a higher percentage of the payment will go toward the principal and less into interest each month until the loan is paid off.
Why does more of my payment go toward interest at the beginning of the loan?
The interest is calculated against the loan’s outstanding principal balance.
At the beginning of the loan, the principal balance is large; therefore, so is the interest. As time goes on and you start paying down your principal, the amount of interest you pay goes down with it. More of your payment will go toward principal until your loan is eventually paid off. It’s also important to know that interest accrues daily, so when you make your payment really makes a difference.
If you make the payment on time, you only pay the interest you originally planned.
Here’s how that typically plays out:
- If you pay early, less interest will accrue and more of your fixed payment will go toward your principal.
- When you pay late, more interest will accrue and more of your fixed payment will go toward interest.
- If you get in the habit of paying late, you pay more interest than you originally planned.
- When you get in the habit of paying early, you save money and pay off your loan sooner than expected.
Paying your auto loan on time will give you the ability to save more every month, and put more away into your Kelly Community savings account. The more you save, the more you earn more in dividends.
This week’s financial tip comes from one of the Certified Financial Counselors on staff here at Kelly Community.