How to Budget for a New Auto Loan: Monthly Payments vs. Full Payment

Deciding how to pay off an auto loan isn’t the same for every borrower and it varies based on your spending needs. One borrower may opt into doing a monthly payment plan to establish their credit score, while another might decide to pay the total cost of the auto loan in advance and avoid paying interest. 

In my years working directly with Loan Officers, I’ve learned their best tips and practices when it comes to budgeting for and making loan payments.

In this article, I'll share those tips and help you understand the basics behind payment types and how they'll affect your credit score. Ultimately, I want to help you make the best decision when deciding on an auto loan repayment option!     

the pros and cons of monthly payments 

Making monthly payments are an affordable option when you have other expenses like rent and other bills, additional monthly loan payments, and savings plans.

how do the monthly payments affect my credit score?

Just having an auto loan affects your credit score. Your payment history makes up 35% of your score, when you make monthly payments on time, you're increasing your score by establishing a good payment history. 

If you’re behind 30 or more days of missed payments, lenders see you as a risk, your car can be repossessed and your credit would be ruined.  If you are looking to establish a credit history, making on-time monthly payments on an auto loan would be the way to go.

what are the pros and cons of paying the total cost of an auto loan?

Determining how to pay off an auto loan depends on your budget and the circumstance, as well as your preference when it’s time to repay the loan. As we learned above, monthly payments are beneficial if you’re looking to establish or improve your credit score. However, paying off an auto loan in full comes with some benefits, too:

what happens if i pay more than my monthly payments?  

If you’re like most borrowers who dread having debt, then paying more than the agreed amount on an auto loan bill is a way of paying off an auto loan early. You’ll be paying off your principal faster and you’ll reduce any accrued interest. But to do this, you’ll need to have extra room in your budget. 

Here’s a chart to better help when choosing a repayment option that'll work for you:  

how can i budget for an auto loan?

I recommend budgeting apps that will help track your spending, like Rocket Money. It’s an all-in-one financing app that can track your spending, help you lower the cost of your bills, as well as cancel subscriptions.

You can also use the resources offered in The Basics of Building Your Budget.  I share some fun tips and tricks as well as budgeting tools that will get you on track with expenses - my favorite budgeting tool is the cash envelope system.  

how do I calculate my monthly auto loan payments?

Oh, that’s easy! You can calculate your monthly payments by knowing your auto loan amount, the term or duration of the loan, the interest rate, and fees!  Feel free to add your calculations below:

here's what'll help you determine the payment option that works for you   

Before you apply for your auto loan, look at your finances and see how much you can realistically afford. If you have more than enough funds to buy 2 cars at once then you can afford to make a total payment on an auto loan. This will allow you to focus on other big-ticket items like mortgage payments, big trips, or your savings. 

If you don’t have enough money saved to buy a car twice at the same time, I suggest opting into monthly payments. You can enjoy a new car while on a budget when opting into monthly payments.

Either way, once your auto loan is paid in full  - it’ll be time to do a happy dance because you’ll be an official car owner,  with your car title and all - Woo hoo!