How to Manage a Car Loan

By: Tristin Hopper

Manage Your Car Loan by Making a Budget

The first step to managing your car loan is to see how it fits in your overall budget. If you've gotten a loan, you're already locked in on a set payment each month. Write down all your other monthly expenses (mortgage payments, food, entertainment expenses, etc.) and weigh those against your monthly auto payments. Auto payments should be a comfortable, manageable portion of your gross income. If you find yourself making undue sacrifices to pay off your new vehicle, you may want to consider getting a cheaper car. Using an online "loan calculator" can help you plot a monthly budget.

Keep in mind that it takes much more money to keep a car running than simply paying off the loan. On average, the total cost of car ownership is around 1.5 times higher than the cost of paying off the loan [source:]. Remember to budget for insurance, gasoline and regular maintenance such as oil changes and new tires.


Most consumers spend about 11 percent of their monthly income on car payments [source: Sahadi].In some cases, that percentage can balloon as high as 15 to 20 percent [source: Weston] By comparison, the monthly food expenses of an average American household are only 12.4 percent of total income [source:]. Hopefully, you were prudent when applying for your auto loan so that your monthly payments are about 8 percent of your monthly income.

An easy way to make sure you pay your car payment on time is by selecting the most convenient payment method. You may choose to pay online, or by mailed check, or even in-person at the financial institution. But if you're looking for the quickest and easiest method, consider setting up an automatic payment plan. Under this plan, a set amount is automatically drawn from your bank account every month. Provided you keep enough cash in your account, an automatic payment plan ensures that you can avoid the credit dips and late fees associated with late fees. Many institutions will even reward an automatic payment plan by charging lower fees.

Simply put, the faster your pay off your loan, the more money you'll save. Hopefully you were able to pay a substantial down payment, but if not, it's still possible to speed up the term of a loan -- as long as there are no penalties associated with early or extra payments. Four-fifths of all car loans in the United States last longer than four years -- a worrying sign for an increasingly debt-ridden populace [source: Healey]. Plan to pay off your car within 48 months at the most. Any longer, and it might be a good idea to start considering a cheaper car.

Should an unexpected cash windfall ever come your way, it's a good idea to put it toward paying off your car loan. Your car will be free and clear much quicker, and you'll save interest in the long run.

Keep reading to find out how you can swap out your original loan for a better deal.