There is no shortage of options when it comes to making your car payments, it just depends on what your lender accepts as a form of payment. You likely also have options for how you split up your payment, or make it most convenient for you. Before you worry about that, it's important to know the basics of your car loan payment and how it works.
There's more than one form of car loan payment available, but the most widely used type of payment is a fixed payment, where you pay the same amount each month for a set number of months. There are also variable payments, which aren't very common since they're typically tied to variable interest rates, which aren't typically used in auto financing, balloon payments, and step-up or step-down payments as well.
In addition to the type of payment structure your loan uses, there are also options when it comes to how you make your payments; auto pay, in-person, online, over the phone, and mail-in options are generally accepted. Most likely, your auto loan is on a monthly payment schedule, however, some dealerships also offer biweekly, weekly, or semi-monthly payment options.
It's essential to understand your combination of options so that you can keep up with timely payments. Missing loan payments only leads to default and repossession, a position no one wants to find themselves in.
Understanding Payment Terms
The date your loan payment is due is typically 30 to 45 days after you sign your contract, with subsequent payments every 30 days thereafter. This is the most common scenario for car loans; however, some dealerships, particularly buy here pay here dealers, may allow for biweekly or weekly payments.
Most lenders allow a grace period of around seven to 15 days for late payments, but this isn't a universal practice, so it's a good idea to ask your lender what their policies are before you sign the contract. After a grace period ends, you're usually subject to late fees, and your account will be considered delinquent.
To understand your auto loan more fully, you need to know how interest affects your loan. The total you pay on your loan will be the financed amount plus interest. Interest is the cost of borrowing money, and the higher your interest rate is, the more you will repay on your loan.
Since most auto loans are simple interest loans, interest accrues daily based on the balance of your loan. At first, more of your payments will pay your interest, while less goes toward bringing down your principal. As your loan balance lessens, you're charged less interest, and more of your payment will go towards your balance.
Managing Your Payments
When it comes to managing your auto loan payments, it's important to help yourself anyway you can. Ensure that you set reminders and put your payment due date in your calendar notifications. If you're really worried about missing a payment, autopay is typically an option with most lenders these days.
Other payment options may include:
- Online payments
- Automatic bank withdrawals
- Payments via mobile apps
- Mail-in payments
- Payment by phone
- In-person payments
When you're having trouble managing your payments or you just want to pay off your loan faster, there are several ways you can do that as well. Since auto loans use the simple interest formula, the faster you can reduce the balance, the more money you can save in interest charges over the loan term.
Here are some options for saving time and money on your car loan:
- Split your payments – When you split payments, you reduce the loan balance at the beginning of each month, which means you save money in interest charges for the rest of it. To do this, divide your monthly payment in half, and pay one half at the beginning of each month and the remaining half on or just before your payment due date.
- Pay biweekly – Another way to save money and time is by making biweekly payments. With this strategy, you make a half-payment every two weeks, regardless of your due date. By doing this, you end up making 13 full monthly payments every 12 months, so you shave a month off your loan term every year.
- Pay more when you can – If a split payment or a two-week schedule isn’t realistic for you, you can still save time and money by paying a little (or a lot) extra whenever you can. Remember, simple interest loans accrue interest based on what you owe, so anytime you can reduce the loan balance, the more you save in the long run.
- Round up what you owe – This method of payment helps you save on interest charges if you can afford to take advantage of it. All you have to do is round up your monthly payment and stick to paying that amount each month. For example, if your payment is $337 for 60 months on a $15,000 loan with a 12.5% interest rate, you could round up and pay $375 a month. Ultimately, this would lead to paying off your loan seven months early and saving $743 in interest charges. Not bad for less than $40 more a month!
- Refinance your car loan – If saving time isn’t the issue and you’re looking to save money on a bad credit auto loan, a fifth option you could have is refinancing. If your loan came with a particularly high interest rate due to bad credit, refinancing at a lower interest rate helps you save money. In order to qualify for refinancing, your credit score has to have improved since taking out your original loan. Additionally, your vehicle needs to meet the lender's age and mileage limits, and your loan amount has to qualify. You can typically apply for refinancing with your current lender, although most refinancing is done with a new lender.
Frequently Asked Questions (FAQs)
Can I change my auto loan payment due date?
Yes, in most cases, lenders will allow you to move your payment due date if the current setup makes it hard to make your payments. This may not always be the case, but at the first sign of trouble, it's a best practice to contact your lender and see what options they have available.
How do I manage multiple auto loans?
Managing multiple auto loans can be a challenge, but if you have a strategy, it can help. Some tips include staggering your payment due dates, setting up automatic payments, or refinancing to lower rates on both loans. You may also be able to refinance and combine your loans into one monthly payment. This is known as auto loan consolidation or a consolidation refinance, and it's not a very common practice.
How does late payment affect my credit score and future loans?
Late payments can impact your loan by making you default, which means your vehicle will be subject to repossession. A repo stays on your credit report for seven years, and it can be harder to get a loan in the first year or two after it happens. This is because the repo makes lenders hesitant to work with you, and it also lowers your credit score, making your pool of lenders narrower to begin with.
