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When you apply for a mortgage loan, the lender will check all of your monthly bills. My largest
monthly bill used to be my very large auto loan. There are two big problems with car loans:
first they reduce the size of the home loan you qualify for and second they eat away at your savings
because you pay a ton of interest. In saving for my down payment and preparing myself to qualify
for a mortgage, paying off my car loan was one of my best moves yet.
How Do Car Loans Impact Your Mortgage Amount?
This one is actually simple. Since the subprime mortgage bubble burst, lenders are being very
cautious. They want to make sure that you have a large margin of safety and always have more than
enough money each month to pay your mortgage loan. To gain this level of confidence, they look at
your monthly recurring bills and factor these into your loan amount. Since I have no credit card
debt, my largest monthly recurring bill was my auto loan. I recently used a large part of my savings
that would have otherwise gone directly to my down payment to pay off my auto loan. While
it reduced the amount of money I have saved for my down payment, it increased the amount of money
lenders are willing to loan me.
How Do Auto Loans Impact Your Bank Account?
Qualifying for a greater loan amount is not my only success. With each monthly auto payment, I was
paying for both principal (money toward owning the car) and interest (money that goes directly to
the bank's pocket for loaning me money). The interest rate on my auto loan was higher than I
could hope to make on cash in my down payment savings account so the interest payments were
actually reducing the amount of money I was saving over time. Now that I don't have a car loan,
I have eliminated all interest payments which means more money in my pocket and in my savings
How Can I Pay Off My Car Loan?
In many cases this one is not going to be easy because cars are expensive. My top level advice is
to do whatever it takes to save enough money to pay off your car. If you already have enough saved,
I recommend paying off your car like I did. It may be difficult in the short term especially as
you see you savings account declining dramatically however it will give you much more leverage going
forward, both in savings and in loan qualification. If you don't have enough money saved, I recommend
utilizing all the money saving tips on this site. Saving
money to pay off your auto loan is exactly like saving money for a down payment, however on a smaller
scale. One way to look at this is an exercise in savings to prepare you for saving for you down payment.
Moreover, once you have paid off your car, you will have a sense of accomplishment and ownership, it
will give you a hint of what it will be like once you have save your house down payment and own your
own home. This taste of success can be quite motivating!
What If It Will Be A While Before I Can Pay Off My Loan?
This is totally understandable, it may take some time to be able to save up enough to pay off
your car. In the meantime, I suggest checking your interest rate versus the current market. You
may be able to refinance your auto loan to a lower interest rate. This is a great thing because
it instantly unlocks savings. To understand the current rates and your options, I recommend you
Google "refinance auto loan"
and explore the offers. Sites will come up that offer up to 4 auto loan refi quotes and you will
want to look into the ones that are big brand names. If you enter your information into these sites,
be prepared to be contacted by salespeople who will try to close the deal quickly. My advice is to
wait until you have multiple offers and then take the lowest one and the one that makes the most
sense in your specific situation. Comparison shopping for a low car loan interest rate is the second
best way to save money on your auto loan, besides paying off the loan.
One closing piece of advice is
to consider selling your car and downgrading to a cheaper car. If you have a sports car and your
auto loan is very high, this might make the most sense in saving money on your loan and also
saving money on
gas. However, I must add the caveat that I definitely did not follow this advice
myself. I let my sports car auto loan wipe out a lot of my savings but rules are meant to be
broken and you must enjoy the journey too. Armed with this information, you will want to make the
best decision not only for your down payment savings but for your quality of life.