Have you ever looked at your auto loan statement and thought "wait... I pay $400 a month... how is my balance not going down faster than this!?!?!"
Sometimes it can feel like our success is being sabotaged... like we don't have enough "insider information" to understand how our money works. Every once in a while, wouldn't it be nice if there were just some easy, practical, REAL tips that could help the average lady keep her money in her pocket?
Well, when it comes to loans... there ARE a few such tips, and I'd like to share them with you now. These tips can be applied to:
-auto loans
-student loans
-mortgage loans
-home equity loans
-unsecured or secured personal loans
-many revolving personal lines of credit (but NOT credit cards)
These tips can be applied to any loan... no matter the balance owed, the rate of interest, the maturity date. You can apply these tips to every loan you have and you will see positive effects... I promise. We'll start with the simple ones (read: the ones that don't involve math).
1) Avoid financing through the dealership (auto loans only)
Dealerships are great about making things seem "easy" for you... they'll even take care of financing, so that you don't have to find a bank that's willing to give you a loan. They butter you up even more by guaranteeing that they will get you the lowest rates possible! It's like one-stop shopping for you... which is why a large majority of people agree to finance through the dealership.
But there's a lot more that they aren't telling you. And, regardless of how sweet the deal may seem, I will guarantee you that you could ALWAYS get a better deal.
Here's the scoop. Dealerships work with, generally, 3 or 4 banks to provide financing for their customers. When you apply for financing, the dealership gets rate quotes from each of those banks and then (generally) chooses the bank that offers the lowest quote. Let's say that rate quote is 5.5%. Then (here's the clincher), before they present you with the offer, they tack on an additional .5% to 1%. They come to you and offer a rate of, say 6%... promising that they are offering the lowest rate possible.
It's true, because they chose the lowest rate quote they were given. But it's false... because the dealership ALWAYS adds a percentage. The base quote, given by the bank, of 5.5% will always be paid directly to the bank. But that extra .5%... that will get paid to the dealership. That's a HUGE portion of a dealership's revenue, which is why they push you to do in-house financing... they need that interest money.
So, how do you beat it? First, check with your bank. Many times you can get lowered rates or "premier rates" on loans because you have a checking and/or savings account with that institution. If your bank isn't able or willing to finance you, then go to the dealership... let them do all the work and present you with the quote. Ask them what financial institution you would be financing through, and then WALK AWAY. Go directly to that bank... generally, if they were willing to finance you through the dealership, they'll be willing to finance you directly. And you won't have to have that additional interest tacked on.
2) Round up
Ok, this is easier said than done sometimes, but I guarantee it will make your life easier... in more than one way. On larger loans (like a mortgage or automobile loan), I recommend rounding to the nearest 50. (If your minimum payment is $482... just make your payments for $500.) On smaller loans you can round up less... to the nearest $25, or even to the nearest $10 if that's all you can afford. But round up.
The extra money helps pay down your principle balance faster, which helps you pay the loan faster and, in the end, pay less money in interest. (See the next part for more information about interest...)
(Note: Check with your financial institution to ask how they process overpayments. Some banks automatically apply the extra $$ to your principle balance. Others give you the option to have it applied as principle OR as a credit toward your next month's payment. Different people have differing opinions as to which method is better... and really, either is just fine. The important thing to remember is this: If you bank applies the extra balance as a credit toward your next month's owed amount, your next statement balance will be lower. DON'T pay the lower amount. Never forget... with loans, you always have a minimum payment amount. Even if your statement shows that you are paid ahead, you should stay in the habit of paying your contractual amount every month. After all, it doesn't help to pay an overage if it's not going to count as an overage... The benefit to showing "paid ahead", though, is this: if something tragic happens in your life and you need to miss a payment, you can do so without penalty, because you are technically "paid ahead" with the bank. This can add a level of comfort or safety for some people, and works very well as long as you're disciplined enough to continue making your minimum payments.)
3) Increase your payment frequency
I learned this technique in training at the bank and thought that it had the potential to save me... a hundred bucks or so on my vehicle loan. At that time I had about 2 years left on my car loan and owed just over $3,000. I was already implementing the above 2 techniques, and I really thought I was getting the maximum savings on my loan. But... by making this small change, I saw my monthly interest amount drop IN HALF. I paid my loan balance a year ahead of schedule and saved myself over 50% in interest. This can be used on any kind of loan that uses simple interest... student loans, car loans, equity loans, private loans, and even some mortgage loans.
Here's the basics that you need to understand. When you make a loan payment, your bank first pays your interest, which has been acruing daily since your last payment, and then the rest is applied toward your principle or remaining balance. The key here is understanding that your interest acrues daily. So, if you make your payment once a month, there are usually 30 or 31 days worth of interest that gets paid... before any money actually starts going toward paying your loan! Depending on your interest rate, this could be a matter of half... or more... of your payment... not even going toward your balance.
So, to save yourself some money, an easy solution is to increase the number of payments you're making. Take your $400 monthly payment and split it in half... make a payment every other week for $200. Or, cut that payment in four and pay $100 every week. As long as you're paying your minimum due within the month, it doesn't matter how many payments are made.
By sending a payment every week (which is what I do and personally recommend to everyone), the bank is only paying 7 days worth of interest at a time, instead of paying 30-31 days. This means that more of your money is going toward your principle balance at each payment. At the beginning, you'll probably only see a savings of about 3 days worth of interest- the three days you normally wouldn't have made a payment. BUT, what you don't see is that those 3 days worth of interest were instead applied to your principle... so you paid your loan down more by... 3 days worth of interest. Next month your interest will be lower because your principle is lower... and you'll apply another 3 days to your principle...
It's like a snowball effect. Each month you are putting more money toward your principle, which cuts down your interest, which cuts down your principle, which cuts down your interest.
I could go into more detailed information about how to calculate simple interest and explain the mathematical logistics of WHY this technique works... but that can get complicated, and this is already a relatively confusing process to understand. So I won't. Maybe in another blog post, somewhere down the line.
The basic rule is this: take your monthly payment, split it into four, and pay it every Friday. Trust me, it will work, and you will save yourself more than enough money to make the change worth the work. By far.
(If you want more information about simple loan calculations, or about anything else in this blog, please email me at cylestbrooksconsulting@gmail.com.)
Sometimes it can feel like our success is being sabotaged... like we don't have enough "insider information" to understand how our money works. Every once in a while, wouldn't it be nice if there were just some easy, practical, REAL tips that could help the average lady keep her money in her pocket?
Well, when it comes to loans... there ARE a few such tips, and I'd like to share them with you now. These tips can be applied to:
-auto loans
-student loans
-mortgage loans
-home equity loans
-unsecured or secured personal loans
-many revolving personal lines of credit (but NOT credit cards)
These tips can be applied to any loan... no matter the balance owed, the rate of interest, the maturity date. You can apply these tips to every loan you have and you will see positive effects... I promise. We'll start with the simple ones (read: the ones that don't involve math).
1) Avoid financing through the dealership (auto loans only)
Dealerships are great about making things seem "easy" for you... they'll even take care of financing, so that you don't have to find a bank that's willing to give you a loan. They butter you up even more by guaranteeing that they will get you the lowest rates possible! It's like one-stop shopping for you... which is why a large majority of people agree to finance through the dealership.
But there's a lot more that they aren't telling you. And, regardless of how sweet the deal may seem, I will guarantee you that you could ALWAYS get a better deal.
Here's the scoop. Dealerships work with, generally, 3 or 4 banks to provide financing for their customers. When you apply for financing, the dealership gets rate quotes from each of those banks and then (generally) chooses the bank that offers the lowest quote. Let's say that rate quote is 5.5%. Then (here's the clincher), before they present you with the offer, they tack on an additional .5% to 1%. They come to you and offer a rate of, say 6%... promising that they are offering the lowest rate possible.
It's true, because they chose the lowest rate quote they were given. But it's false... because the dealership ALWAYS adds a percentage. The base quote, given by the bank, of 5.5% will always be paid directly to the bank. But that extra .5%... that will get paid to the dealership. That's a HUGE portion of a dealership's revenue, which is why they push you to do in-house financing... they need that interest money.
So, how do you beat it? First, check with your bank. Many times you can get lowered rates or "premier rates" on loans because you have a checking and/or savings account with that institution. If your bank isn't able or willing to finance you, then go to the dealership... let them do all the work and present you with the quote. Ask them what financial institution you would be financing through, and then WALK AWAY. Go directly to that bank... generally, if they were willing to finance you through the dealership, they'll be willing to finance you directly. And you won't have to have that additional interest tacked on.
2) Round up
Ok, this is easier said than done sometimes, but I guarantee it will make your life easier... in more than one way. On larger loans (like a mortgage or automobile loan), I recommend rounding to the nearest 50. (If your minimum payment is $482... just make your payments for $500.) On smaller loans you can round up less... to the nearest $25, or even to the nearest $10 if that's all you can afford. But round up.
The extra money helps pay down your principle balance faster, which helps you pay the loan faster and, in the end, pay less money in interest. (See the next part for more information about interest...)
(Note: Check with your financial institution to ask how they process overpayments. Some banks automatically apply the extra $$ to your principle balance. Others give you the option to have it applied as principle OR as a credit toward your next month's payment. Different people have differing opinions as to which method is better... and really, either is just fine. The important thing to remember is this: If you bank applies the extra balance as a credit toward your next month's owed amount, your next statement balance will be lower. DON'T pay the lower amount. Never forget... with loans, you always have a minimum payment amount. Even if your statement shows that you are paid ahead, you should stay in the habit of paying your contractual amount every month. After all, it doesn't help to pay an overage if it's not going to count as an overage... The benefit to showing "paid ahead", though, is this: if something tragic happens in your life and you need to miss a payment, you can do so without penalty, because you are technically "paid ahead" with the bank. This can add a level of comfort or safety for some people, and works very well as long as you're disciplined enough to continue making your minimum payments.)
3) Increase your payment frequency
I learned this technique in training at the bank and thought that it had the potential to save me... a hundred bucks or so on my vehicle loan. At that time I had about 2 years left on my car loan and owed just over $3,000. I was already implementing the above 2 techniques, and I really thought I was getting the maximum savings on my loan. But... by making this small change, I saw my monthly interest amount drop IN HALF. I paid my loan balance a year ahead of schedule and saved myself over 50% in interest. This can be used on any kind of loan that uses simple interest... student loans, car loans, equity loans, private loans, and even some mortgage loans.
Here's the basics that you need to understand. When you make a loan payment, your bank first pays your interest, which has been acruing daily since your last payment, and then the rest is applied toward your principle or remaining balance. The key here is understanding that your interest acrues daily. So, if you make your payment once a month, there are usually 30 or 31 days worth of interest that gets paid... before any money actually starts going toward paying your loan! Depending on your interest rate, this could be a matter of half... or more... of your payment... not even going toward your balance.
So, to save yourself some money, an easy solution is to increase the number of payments you're making. Take your $400 monthly payment and split it in half... make a payment every other week for $200. Or, cut that payment in four and pay $100 every week. As long as you're paying your minimum due within the month, it doesn't matter how many payments are made.
By sending a payment every week (which is what I do and personally recommend to everyone), the bank is only paying 7 days worth of interest at a time, instead of paying 30-31 days. This means that more of your money is going toward your principle balance at each payment. At the beginning, you'll probably only see a savings of about 3 days worth of interest- the three days you normally wouldn't have made a payment. BUT, what you don't see is that those 3 days worth of interest were instead applied to your principle... so you paid your loan down more by... 3 days worth of interest. Next month your interest will be lower because your principle is lower... and you'll apply another 3 days to your principle...
It's like a snowball effect. Each month you are putting more money toward your principle, which cuts down your interest, which cuts down your principle, which cuts down your interest.
I could go into more detailed information about how to calculate simple interest and explain the mathematical logistics of WHY this technique works... but that can get complicated, and this is already a relatively confusing process to understand. So I won't. Maybe in another blog post, somewhere down the line.
The basic rule is this: take your monthly payment, split it into four, and pay it every Friday. Trust me, it will work, and you will save yourself more than enough money to make the change worth the work. By far.
(If you want more information about simple loan calculations, or about anything else in this blog, please email me at cylestbrooksconsulting@gmail.com.)
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