I hear a number of times from people saying they cannot afford the car or furniture they would like to own because the monthly payments will be too high. An idea for lowering the monthly payment is to increase the initial down payment. Determine the payment you would be happy with for each month, then start a routine of paying yourself for that calculated monthly expense into a savings account. Paying yourself as though a loan will allow you to get used to budgeting for an additional expense before committing to a loan payment with a bank. The extra money put away each month can then be used towards a down payment that can eliminate the need for a loan or reduce the loan amount. The reduced loan amount will also result in less interest paid to the bank over the life of the loan. You will benefit dramatically by getting used to a lower payment instead of later struggling with a higher payment you cannot maintain comfortably.

     Existing loans, except a home mortgage, can be refinanced to a lower interest rate (assuming the rates have lowered) for a minimal fee or even no fee. A $10,000 car loan at 9% interest for 5 years yields a monthly payment of $207.50. After 2 years, the remaining principal amount is $6,528. Refinancing the principal amount with another bank or even the same bank offering a 7.5% loan for 3 years will result in a new monthly payment of $203 which is $4.50 less with a total savings of $163 in interest for the term of the loan. If the bank happens to offer a fee for the new car loan, any amount less than the $163 saved will still be to your benefit. You can even save more interest and pay the loan a few weeks early by continuing to pay the original $207.50.

     The same idea can be applied to personal loans and collateral loans. The banks are interested in receiving extra income by offering you a loan at a better rate. The technique is similar to jumping from one credit card to another offering a better interest rate.


Return to Money Management Topics.