Advertisement
Buying & Leasing a Car

Leverage a Low-Rate Car Loan

You could put less money down on a new car with a low-rate loan, and use the cash you free up to retire a higher-interest loan.

We have about $9,000 remaining on our car loan at 5.99% interest. We’ll be buying a second car soon and have been offered a 1.99% auto loan. Now we are wondering if we should use some of the money we had planned to use for a down payment on the new car to pay off the 5.99% loan and put less down on the car with the lower-interest loan?

Advertisement - Article continues below

That could be a good way to take advantage of today’s low interest rates if you’re going to buy a new car.

Find out how much of a down payment is required to qualify for the 1.99% rate -- a 10% down payment is common, says Greg McBride, senior financial analyst with Bankrate.com. “With a rate that low, there’s no incentive to put down more than you have to,” he says. And make sure your old lender doesn’t have a penalty for early payoff (most don’t for standard loans).

You may be able to get an even better deal on your new loan, especially if you have a good credit score. Gerri Detweiler, of Credit.com, says the 1.99% is attractive, but the lowest national rate is currently just 0.74% for a four-year loan and 1.37% for a five-year loan. You could also refinance your current car loan -- the low is now 1.29% for a four-year loan, says Detweiler. You may also have to pay an application fee or closing costs to refinance.

Advertisement
Advertisement - Article continues below

Detweiler notes that if you do put little money down on the new car, you could be upside upside-down for a while -- meaning you owe more on the loan than the car is worth. You can minimize this problem by boosting the down payment, shortening the loan period, buying gap insurance to pay the difference between the car’s depreciated value and the loan balance if your car is totaled, or keeping extra money in savings to self-insure this potential risk.

If you have extra cash beyond the minimum down payment, ask yourself whether paying off the higher-interest loan on your other car really is your top priority. Consider your overall financial situation and how the extra money can help. “That cash may be better used to pad their emergency savings, pay down other higher-cost debts, or make an IRA or college-savings contribution,” says McBride.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020

Recommended

Protecting Your Car During COVID-19
cars

Protecting Your Car During COVID-19

Lack of exercise won’t make your car flabby, but problems with the battery, the fuel and even malevolent wildlife are a real possibility.
June 12, 2020
A Shocking Story of Electric-Car Life
cars

A Shocking Story of Electric-Car Life

If you travel more than, say, 150 miles from home more than a few times a year, I don’t see an electric car working as your primary vehicle.
May 26, 2020
How to Buy a Car (for Less!) During COVID-19
deals

How to Buy a Car (for Less!) During COVID-19

Safety first, but don’t rule out the old-school approach of just picking up the phone and calling your local dealer.
May 5, 2020
The 10 Best Cars for Senior Drivers
cars

The 10 Best Cars for Senior Drivers

Whether you're 50, 60 or 70, you may start thinking about a vehicle that conforms to your chassis, instead of the other way around.
April 27, 2020