5 Ways to Minimize Your Auto Debt

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Keep your debt down with these helpful tips.

It's estimated that just over three-quarters of American commuters drive to work. If you're one of them, then you clearly need a reliable vehicle to get back and forth. But that doesn't mean you need to take on a ton of debt to get your hands on a decent car. Here's how to keep your auto debt down -- so you have more money left over in your budget for other important purposes. 

1. Buy a used car

It's a known fact that new vehicles lose a large chunk of their value the moment they're driven off the lot. In fact, they're said to depreciate up to 50% within three years. As such, you might manage to buy a three-year-old used car for about half the price of its newer counterpart. This isn't an exact science; your savings may vary depending on the exact vehicle you choose. But generally speaking, you'll reduce your costs by opting for a used car, and if you're financing that vehicle with a loan, you won't need to borrow quite as much. 

2. Buy a new compact car

AAA estimates that it costs $9,282 a year, on average, to own a vehicle. That figure drops to $7,114, however, when you choose a compact car over a larger automobile. That's a huge amount of savings, and while some of it relates to fuel costs and maintenance, you can generally purchase a compact car at a lower price point, which means you won't need to borrow as much to swing it. 

3. Skip the bells and whistles

It may be nice to have a vehicle with heated seats, a built-in navigation system, and other perks -- but how badly do you really need those features? If you're willing to scale back a bit, you'll pay less for your vehicle, and won't have to take on as much debt. That said, you don't want to make your life too inconvenient, so while it's smart to skip the split movie screen, you shouldn't feel guilty about splurging for automatic windows and doors. 

4. Supply more of a down payment

The more money you're able to put down to buy your car, the less you'll need to borrow. If you boost your savings for a few months, you'll be able to increase your down payment. You can do this by cutting back on expenses, and/or by getting yourself a second job on a temporary basis. 

Imagine you're looking at buying a $20,000 vehicle that you can finance at 5% interest over a five-year repayment period. If you put down $3,000, you'll wind up with monthly payments of $321. Over five years, that's $19,260, of which $2,260 is interest. On the other hand, if you manage to put down $5,000 under the same terms, you'll end up with a monthly payment of $283. In the course of five years, that's $16,980, of which just $1,980 is interest. 

5. Boost your credit score for better rates

The higher your credit score, the more likely you are to snag a competitive rate on your auto loan. And that, in turn, can help keep your debt to a minimum. If your credit score isn't great, you can boost it by consistently paying incoming bills on time, and also by paying off a chunk of your existing debt to bring down your credit utilization

In the above example, a $17,000 auto loan payable over five years at 5% interest resulted in a monthly payment of $321. But if your credit isn't strong enough to snag that rate, and you only qualify for 9% interest, your monthly payment will be $353 instead. That may not seem like a huge difference on a monthly basis, but over five years, that's an extra $1,920. 

The less money you have to borrow for a car, the more you'll have available to save, spend, or apply to other financial goals you have. It always pays to keep the loans you take out to a minimum, and if you follow these tips, you won't be too weighed down by auto debt.

Our Research Expert