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 goal is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide original and accurate content. This allows users to conduct research and analyze information without cost, so that you can make financial decisions without a doubt. Bankrate has agreements 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 are from companies who pay us. This compensation could affect how and where products appear on the site, such as the order in which they may appear in the listing categories and other categories, unless prohibited by law. Our mortgage home equity, mortgage and other home loan products. However, this compensation will affect the content we publish or the reviews that you read on this site. We do not cover the entire universe of businesses or financial offerings that could be open 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 specializes in helping readers with the ways and pitfalls of borrowing money to buy an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers feel confident to control their finances by providing clear, well-researched information that breaks down otherwise complex issues into digestible chunks. The Bankrate guarantee
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There are money-related questions. Bankrate has answers. Our experts have helped you understand your finances for more than four decades. We continually strive to give our customers the right advice and tools required to be successful throughout their financial journey. Bankrate adheres to strict standards standard of conduct, which means that you can be sure that our content is truthful and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the best financial choices. The content created by our editorial team is objective, truthful and uninfluenced through our sponsors. We’re open about how we are in a position to provide quality content, competitive rates, and useful tools to our customers 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 specific links on our site. Therefore, this compensation may influence the manner, place and when the products are listed within categories, with the exception of those the law prohibits it for our mortgage or home equity, and other home lending products. Other factors, such as our own proprietary website rules and whether a product is available in the area you reside in or is within your personal credit score could also affect how and where products appear on this website. We strive to offer a wide range offers, Bankrate does not include information about each credit or financial item or product. If you are looking to save money on your next purchase of a car, you’ll need to do more than just make a great bargain with the person selling the . A mistake when taking out the money could end up costing you and erase any savings that you have negotiated on the purchase price. It’s true that it’s not that uncommon, especially among people with good credit scores. A report from the Financial Times revealed that 3 percent of prime and super-prime customers received auto loans with an APR of at least 10 percent, which is nearly double the average rate of the credit score of their borrowers. Not shopping for the most affordable deal in auto loan financing only one of the mistakes you should avoid. Here are some others to be aware of if you wish to secure the most affordable deal. 1. Avoiding shopping around is an easy and efficient method to secure an auto loan however it isn’t without cost. Dealers typically mark up their rates by a couple of percent to ensure they profit. Before visiting the dealership look around and visit the banks and credit unions. This will give you an idea of the interest rates you can get for your credit score and ensure you get the best deal. Keep in mind that banks’ requirements might be more stringent than credit unions’, but they may offer better rates than you’ll find at the dealership. If this is your first time buying a car, look for programs that offer financing for first-time buyers at credit unions. Once you are preapproved for an loan and you’re able to negotiate with the dealership more efficiently. After all, if the dealer doesn’t beat the rate you already have, you don’t need to rely on their financing to purchase the car you’ve always wanted. Key takeaway
Preapproval will guarantee you get the most competitive rate and will give you the leverage to bargain.
2. Negotiating the monthly payment instead of the purchase price Although the monthly installment on your vehicle loan is important — and you must know in advance every month — it shouldn’t be the sole basis of your . After you’ve volunteered, the each month’s car loan amount informs the seller how much you are willing to spend. The salesperson could also try to conceal other costs, like an increased interest rate or additional charges. They could also offer you with a longer payment timeframe, which can allow you to keep the monthly installment within your budget but cost you more overall. In order to avoid that, you should negotiate the purchase price of the car and then each time instead of focusing solely on the monthly payment. The most important thing to remember is
Don’t buy a car based on the monthly installment alone as the dealer might utilize that information to stop negotiations at a standstill or upsell you.
3. Let the dealer determine your creditworthiness. Creditworthiness determines your interest rate and a person who has an excellent credit score is eligible for a higher car loan rate than one who has a low credit score. Shaving only one percentage point of interest off a $15,000 car loan over a period of 60 months could be a huge savings in the interest paid over the course that the loan. Knowing your credit score in advance of time puts you in the driver’s seat when it comes to negotiations. With it, you’ll be aware of the rate you should expect — and if your dealer is trying overcharge you or lie about the amount you qualify for. What is an unacceptable APR for a car loan? New auto loans had an of 6.07 percent in the fourth quarter of 2022, according to figures from . People with excellent credit qualified for rates around 3.84 percent, whereas those with bad credit had an average new car rate of 12.93 percent. Used car rates were higher — 10.26 percent across credit scores. And the was a sky-high 20.62 percent. Therefore it’s a “bad” Annual percentage ratio for car would be on the upper range of these figures. Legally, loans cannot have an interest rate of more than 36 percent. Seek a lender who offers an average rate for your credit score, or better. The most important thing to remember is
Check out a variety of lenders to find out your estimated interest rates and do whatever you can to improve your credit score before going to the dealer.
4. Do not choose the correct term length ranges between 24 and 84 months. Longer terms may offer tempting and lower monthly payments. But the longer, the higher interest you’ll pay. Certain lenders will also offer a higher rate of interest when you choose to take an extended repayment timeframe because there’s a greater risk you’ll become upside-down on the loan. To determine which is the best option for you, think about your top priorities. If, for instance, you are the type of driver interested in getting driving an updated vehicle every couple of months, being stuck in an extended loan may not be the best option for you. On the other hand in the event that you’re on a limited budget and a long-term loan may be the only option to afford your vehicle. Utilize a calculator to determine 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 less in interest overall but it will also have higher monthly payments. A longer-term loan will come with smaller monthly payments, however it will cost you more cost of interest over the course of time.
5. Financing the costs of added-ons Dealerships make money from — particularly aftermarket products sold through Finance and Insurance department. If you’re looking for an insurance policy or gap insurance, these options are available for less through sources other than the dealership. Wrapping these add-ons into the financing you choose to use will increase the cost in the end as you’ll be charged interest on these items. Question every fee you aren’t sure about to prevent unnecessary charges to the purchase price. If there is an add-on that you’re really interested in, pay for it out-of-pocket. If you want to make sure, ask whether it’s available at a different dealership for less. Buying from a third party is usually cheaper than aftermarket items including extended warranties . Key takeaway
In the end, financing add-ons will lead to more interest paid over the long run. Prepare yourself for negotiations by knowing which add-ons you truly need and which you can find cheaper elsewhere.
6. Moving negative equity forward ” ” on an auto loan is when you owe more on your car than what it’s worth. Lenders may allow you to transfer that equity into the new loan but this is not a prudent decision for your financial situation. If you do, you’ll have to pay interest on your previous and current car. If you were upside down on your last trade-in it is likely that you will be again. Instead of rolling negative equity into your new loan Try it before taking out the new one. You can also pay off your negative equity prior to transferring it to the dealer in order to avoid paying excess interest. Key takeaway
Do not roll any negative equity in your car forward. Instead, you should pay off as much of your old loan as you can, or take the amount that is left when you trade in your car.
The main thing to success when you take out an auto loan is preparedness. This means negotiating the monthly installment and understanding your credit rating, choosing the appropriate duration, making sure you are aware of additional expenses and avoiding carrying across negative equity. Make sure to be aware of potential mistakes when you negotiate, and with luck, you will be able to save money and time. Learn more
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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 borrowing money to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping their readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites.
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