6 common car loan mistakes that cost you money Part Of Buying a Car In this series Buying a Car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive tools and financial calculators as well as publishing objective and original content. This allows you to conduct your own research and compare data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site come from companies who pay us. This compensation may impact how and where products are displayed on this site, including such things as the sequence in which they appear within the listing categories, except where prohibited by law for our mortgage or home equity products, as well as other products for home loans. However, this compensation will have no impact on the information we provide, or the reviews appear on this website. We do not contain the vast array of companies or financial deals that may be accessible to you. My Ocean Production/Shutterstock
5 min read Published March 02, 2023
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in understanding the ways and pitfalls of borrowing money to purchase an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to control their finances by providing clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces. The Bankrate promise
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You have money questions. Bankrate can help. Our experts have been helping you manage your finances for more than four decades. We strive to continuously provide consumers with the expert guidance and the tools necessary to succeed throughout life’s financial journey. Bankrate follows a strict , which means you can be sure that our content is honest and reliable. Our award-winning editors and reporters provide honest and trustworthy information to assist you in making the right financial decisions. Our content produced by our editorial staff is factual, objective, and not influenced from our advertising. We’re honest about how we are able to bring quality information, competitive rates and helpful tools to you , by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the promotion of sponsored goods and services or when you click on certain hyperlinks on our site. This compensation could impact how, where and in what order items appear within listing categories, except where prohibited by law for our mortgage home equity, mortgage and other products for home loans. Other factors, like our own proprietary website rules and whether or not a product is available within your area or at your self-selected credit score range could also affect how and where products appear on this site. Although we try to offer the most diverse selection of products, Bankrate does not include specific information on each credit or financial product or service. If you’re looking to save money on the next vehicle purchase, you’ll require more than just make a great deal with the salesperson on the . A mistake when taking out an auto loan could result in a loss of money and erase any savings that you have negotiated in the price of purchase. It’s true that it’s not that common, particularly among people with good credit scores. A report from the Financial Times revealed that 3 percent of prime and super-prime borrowers were granted auto loans with an APR of 10 percent or more, which is nearly double the average rate for those with credit scores. Don’t shop for the most competitive rate for auto finance is only one of the mistakes you should avoid. Here are some others to be aware of if you wish to get the best deal possible. 1. Avoiding shopping around is an easy and convenient way to obtain a car loan however it costs extra. Dealers usually mark their rates up by a few percentage points to ensure they profit. Before you visit the dealership, shop around and from credit unions or banks. Doing so will provide you with an understanding of the rates that are available to your credit score and ensure you get the most competitive rate. Keep in mind that banks’ requirements may be more strict than credit unions’, but they can provide better rates than what you get at the dealership. If this is your first time purchasing a vehicle, look for programs that offer financing for first-time buyers in credit unions. Once you are preapproved for an loan then you can deal with the dealership more efficiently. In the end, if the dealership isn’t willing to beat the rate you currently have, you don’t need to depend on their financing in order to obtain the car you’ve always wanted. Key takeaway
Preapproval will guarantee you get the best rate available and will give you the leverage to bargain.
2. The monthly payment should be negotiated rather than the purchase price Although the monthly payment for your car loan is important — and should be have it in advance each month, it shouldn’t be the sole basis of your . After you’ve volunteered, the each month’s car loan amount tells the dealer how much you’re willing to invest. The salesperson might also try to cover up other costs such as a higher interest rate and add-ons. They could also offer you with a longer payment timeframe, which can help keep your monthly payments within your budget but can cost you more overall. To avoid this, you should negotiate the purchase price of the car and each instead of focusing on the monthly payment. Key takeaway
Don’t buy a car based only on the monthly payments as the dealer might make use of that number to put negotiations on hold or to upsell you.
3. Let the dealer determine your creditworthiness. Creditworthiness determines the rate of interest you pay one who has a high qualifies for an improved car loan rate than one with a low score. Reducing only one percentage point of interest from a $15,000 car loan over 60 months could be a huge savings in the interest paid over the life that the loan. Understanding your score on credit prior to time will put you in the driver’s seat when it comes to negotiations. By knowing your credit score, you’ll know the price you can expect — and if you are being pushed by the seller to overcharge you or lie about what you qualify for. What is an unacceptable APR for a car loan? New auto loans have an APR of 6.07 per cent in 2022’s fourth quarter, according to data from . People with excellent credit qualified for rates as low as 3.84 percent, whereas those having bad credit had an average new vehicle price that was 12.93 percent. The rates for used cars were higher than 10.26 percent across all credit scores. The highest rate was 20.62 percent. So, a “bad” APR for a vehicle would be on the upper portion of these numbers. In law, loans aren’t allowed to have an annual percentage rate that is greater than 36 percent. Find an lender who offers the average interest rate for your score or better. The most important thing to remember is
Explore a variety of lenders to determine the estimated interest rates. You can make any necessary steps to improve your credit score prior to heading to the dealer.
4. Not choosing the right term length can be a challenge. The range of durations is from 24 to 84 months. Longer terms may offer tempting low costs. But the , the more the interest you’ll have to pay. Some lenders also charge a higher interest rate in the event you select an extended repayment period since there’s a greater risk you’ll become upside-down on the loan. To decide which is the best choice for you, take a look at your priorities. For example, if you are the type of driver who is looking to get behind the wheel of a new vehicle every few months, then an extended loan is probably not the right choice for you. However, if you have the funds to pay for your car then a longer-term contract might be the only option you can afford the car you want. Make use of a tool to analyze the monthly cost of your car and determine which one is the most suitable for you. The most important thing to remember
A short-term loan will cost you less overall in interest, however it will come with high monthly payments. A long-term loan will have lower monthly payments , but will have higher rates of interest over time.
5. Finance the cost of additional items Dealerships earn from — particularly aftermarket products sold via the Finance and Insurance office. If you’re looking for an insurance policy or the gap insurance options are offered at a lower cost through sources other than the dealership. Incorporating these extras into your financing could result in more expense over the long term as you’ll be charged interest on them. Be sure to inquire about every charge that you don’t know about in order to avoid unnecessary costs to the purchase price. If there’s an extra you really want, pay for it out-of-pocket. If you want to make sure, ask if it’s available outside the dealership at a lower cost. The purchase of a third party is often cheaper for aftermarket items including extended warranties . The most important thing to remember is
In the long run, financing add-ons will result in more interest being paid over the long run. Be prepared for negotiations and know what add-ons are essential and what you can get cheaper elsewhere.
6. The process of rolling forward negative equity ” ” on an auto loan is the case when you owe more money on your car than what it’s worth. Some lenders will allow you to carry that negative equity into an additional loan but this is not a prudent choice for financial reasons. If you do this, you will pay interest on your previous and current vehicle. And if you were upside down when you traded in your last car it is likely that you will be in the same position again. Instead of incorporating negative equity into your new loan first, consider making the move to take out the new loan. You could also pay off the negative equity upfront to the dealer in order to save yourself from paying excessive interest. The most important thing to remember
Don’t roll negative equity from your vehicle forward. Instead, make sure you pay off as much of the old loan as possible or pay the difference when you sell your car.
The most important aspect to success when applying for an auto loan is preparedness. This means negotiating the monthly payment as well as knowing your credit score, selecting the appropriate time frame, and making sure you are aware of additional costs and avoiding rolling across negative equity. Make sure to be aware of potential mistakes as you negotiate, and with luck, you will walk away with saved money and time. Find out more
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The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ways and pitfalls of taking out loans to purchase an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing clear, well-researched information that breaks down otherwise complex topics into digestible chunks.
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