Put Yourself in the Driver’s Seat: 4 Tips to Limit Debt When Buying a Car

Two friends dance to a song as they drive in a car.
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Ready for a new (or new-ish) set of wheels?

Before you set foot in a dealership or start picking out the trim, you should prepare your bank account for a hit — the average price for a mid-size car was $27,968 in October 2019, according to Kelley Blue Book

For people who don’t have an extra $30,000 lying around, that means taking on auto loan debt — and plenty of us do. Outstanding debt balances on auto loans rose $18 billion in the third quarter of 2019, ballooning to $1.3 trillion, according to the Federal Reserve. For comparison, credit card debt rose $13 billion in the same period to $880 billion. 

But just because you need a vehicle doesn’t mean you have to dig a huge financial hole you’ll spend years climbing out of. We’re here with strategies to help you get behind the wheel with the least amount of debt.

4 Ways to Limit Auto Loan Debt

Ready to hit the open road? Before you rev your car-shopping engines, put your finances in park and check out these four ways to avoid taking on any more auto loan debt than necessary. (And in return, I promise to stop with the car puns.)

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1. Set a Budget

Here’s the thing about budgeting for a car: You’re not just budgeting for a car (or at least you shouldn’t be).

You’re also paying for the tax and title, the gas, the oil changes, the insurance and the inevitable nail-in-a-tire-costs-me-how-much moment.

So before you let a dealership lure you in with the promise of a low monthly payment (while glossing over the fact that it’s for a seven-year loan), do your homework. 

Set a budget that you can comfortably live with each month for the car payment plus the regular maintenance — the average maintenance and repair costs for a small sedan are 8.53 cents per mile, according to AAA — and other expenses associated with owning a vehicle.

Better yet, before you start figuring out how big of a loan you’ll need, consider ways you can save money to buy a car. A bigger down payment — or, gasp, paying for that ride in cash — means you’ll fork over less of your hard-earned money for interest on the loan.

2. Know Your Credit Score

Before you drive, you should know where you stand. 

Knowing your credit score can help you figure out how much a car loan will cost since. Your credit score is calculated by a number of factors, including whether you pay your bills on time — and thus can be trusted with lower interest rate on a loan.  

If you’re a superprime (800s) kind of borrower, you can expect to pay thousands less in interest over the life of the loan than the deep subprime (300 to 500) borrower. 

So what if you’re in the less-than-prime territory? Consider ways to improve your credit score before you buy, shop for a more affordable (perhaps used) set of wheels or find a co-signer who has good credit.

3. Get an Auto Loan Preapproval

Once you know your credit score and how much car you can afford, it’s time to get a loan. And although the dealership may seem like a convenient place to finance your vehicle, it’s also likely the costliest (dealers often make more money on the finder’s fee for your loan than they do on the car itself).

Instead, start shopping online for an auto loan preapproval — a financing offer that includes the maximum loan amount, interest rate and terms of the loan. By shopping online, you can compare offers from multiple lenders without a dealer pressuring you to make a decision on the spot.

Pro Tip

Just because you can get approved for a loan doesn’t mean you need to take the full amount — stick to what your original budget dictated you can comfortably pay monthly.

An auto loan preapproval letter gives you leverage when it comes time to discuss financing — simply present the letter to the dealer and ask them to beat your lender’s offer.

Having a preapproved auto loan could end up saving you thousands in interest and gives you the power to search for the best price on the vehicle rather than being shackled to whichever dealer will offer you financing.

4. Break Free of the Underwater Auto Loan 

All of these tips are great if you’re starting fresh with an auto loan, but what if you’re still paying for your old car — and you owe more than it’s worth (also known as negative equity)?

You have a number of choices for getting out of an underwater auto loan. There are the easy-but-unwise options like rolling over your negative equity, which probably puts you underwater immediately on your new auto loan. Or you can choose the tough-but-sensible options, like holding onto your old hunk of junk until you get your loan back above the waterline.

Breaking the cycle of auto loan debt lets you save on the interest you pay and eventually own your wheels outright. Eliminating that extra debt will put you in the driver’s seat to decide where to spend all that extra cash.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.