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 offering interactive tools and financial calculators that provide original and objective content. This allows you to conduct your own research and compare information at no cost - so that you can make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this website are provided by companies who pay us. This compensation could affect how and where products are displayed on this site, including such things as the sequence in which they be listed within the categories of listing, except where prohibited by law for our mortgage or home equity products, as well as other home lending products. But this compensation does have no impact on the information we provide, or the reviews that you read on this site. We do not include the entire universe of businesses or financial deals that may be open to you. My Ocean Production/Shutterstock
5 minutes read. Published March 02, 2023
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in understanding the ways and pitfalls of borrowing money to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are enthusiastic about helping readers gain confidence to manage their finances with precise, well-researched and well-written information that breaks down complex topics into manageable bites. The Bankrate guarantee
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You have money questions. Bankrate can help. Our experts have helped you understand your money for more than four years. We strive to continuously give our customers the right guidance and tools required to succeed throughout life's financial journey. Bankrate follows a strict , which means you can be sure that our information is trustworthy and reliable. Our award-winning editors and reporters provide honest and trustworthy information to assist you in making the right financial choices. Our content produced by our editorial staff is factual, objective, and not influenced through our sponsors. We're honest about the ways we're able to bring quality information, competitive rates and useful tools for our customers by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange 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 in what order items are listed, except where prohibited by law. This is the case for our mortgage home equity, mortgage and other products for home loans. Other factors, such as our own rules for our website and whether the product is available within your area or at your own personal credit score may also influence the way and place products are listed on this website. Although we try to offer the most diverse selection of products, Bankrate does not include details about each credit or financial products or services. If you're looking to save money for your next vehicle purchase, you'll require more than make a favorable deal with the person selling the . An error when buying a could cost you money and erase the savings negotiated regarding the cost of the car. However, it's not the time, particularly for those with credit scores that are high. A study by the Federal Reserve showed the fact that 3 percent of super-prime and prime customers were granted auto loans with APRs of at least 10 percent that is nearly double the average rate of those with credit scores. Doing not shop for the most competitive rate for auto finance is only one of the mistakes you should avoid. Here are some other mistakes to avoid if you're looking to get the most affordable deal. 1. It's an easy and efficient method to secure an auto loan however it costs extra. Dealers often mark their rates up by a couple of percent to ensure they profit. Before visiting the dealership look around and visit banks or credit unions. This will provide you with an understanding of the interest rates you can get for your credit score , and make sure you get the best deal. Keep in mind that banks' requirements may be more strict than credit unions' but they may offer better rates than you'll find at the dealership. If it's your first experience purchasing a vehicle, look for financing programs for first-time buyers in credit unions. After you've been approved for the loan then you can deal with the dealership more efficiently. In the end, if the dealer doesn't beat the rate you currently have, you don't have to count on their financing in order to obtain the car you want. What's the most important takeaway
The preapproval process will ensure that you receive the most competitive rate and gives you an advantage to negotiate.
2. The monthly payment should be negotiated instead of the purchase price Although the monthly installment on your car loan is important -- and should be know in advance every month, it shouldn't form the foundation of your . Once volunteered, a monthly car loan amount informs the dealer how much you're willing to pay. The salesperson may also attempt to cover up other costs such as a higher interest rate and add-ons. They could also offer you on a longer payment timeframe, which can allow you to keep the monthly installment within your budget, but will can cost you more overall. For this reason, you should negotiate the price of your vehicle's purchase and each instead of focusing solely on the monthly installment. Important takeaway
Don't buy a car based only on the monthly payments and the dealer may make use of that number to put negotiations at a standstill or upsell you.
3. The dealer should be able to define your creditworthiness. Creditworthiness determines the rate of interest you pay, and a borrower with good credit scores can get an improved automobile loan rate than someone with a lower score. By reducing just one percentage point interest on a $15,000 car loan over a period of 60 months could be a huge savings in the interest over the life of the loan. Knowing your credit score in advance of time will place you in control in negotiations. By knowing your credit score, you'll be aware of the rate you should be expecting -- and also if you are being pushed by the seller to charge too much you or lie about the loan you're eligible for. What is the worst APR for an auto loan? New auto loans have an APR of 6.07 percent in the fourth quarter of 2022, according to figures from . Credit scores of people with good credit qualify for rates as low as 3.84 percent, while those having bad credit had an average new vehicle cost that was 12.93 percent. The rates for used cars were higher -- 10.26 percent for all credit scores. It was also a record-breaking 20.62 percent. Thus the "bad" annual percentage rate for a car would be on the upper end of these figures. The law states that loans aren't allowed to have an annual percentage rate of more than 36 percent. Look for a lender that offers you the average interest rate for your score or better. Key takeaway
Shop around with many different lenders to get an idea of your estimated interest rates and take any steps to boost your credit score prior to going to the dealership.
4. Do not choose the correct term length can mean a gap of 24 to 84 months. Longer terms may offer tempting and lower monthly payments. But the , the more interest you'll pay. Some lenders also charge higher interest rates in the event you select an extended repayment timeframe because there's a greater risk you'll end up upside-down on the loan. To determine which is the best choice for you, think about your top priorities. If, for instance, you are the type of driver interested in getting driving the latest car every few months, then a long-term loan is probably not the right choice for you. However in the event that you're on the funds to pay for your car and a long-term loan may be the only way to afford your vehicle. Utilize a calculator to determine the monthly cost of your car and determine the best option for you. What you should take away from this
A short-term loan will cost less interest in the long run however it will come with high monthly payments; a long-term loan will offer lower monthly payments , but will have higher cost of interest over time.
5. Financing the costs of additional items Dealerships earn from -- especially aftermarket products that are sold through the finance and insurance office. If you want an or gap insurance, these options are offered for less from sources outside the dealership. The addition of these items to your financing could result in more expense in the end, since you'll be charged interest on these items. Be sure to inquire about every charge that you don't know about to avoid unnecessary additions to your purchase price. If you find an additional item that you're really interested in and can't afford, you should pay it out of pocket. If you want to make sure, ask whether it's sold outside of the dealership at a lower cost. A third-party purchase is typically cheaper for aftermarket products such as extended warranties and . Most important takeaway
In the long term the financing add-ons can result in more interest being paid overall. Prepare yourself for negotiations by knowing the add-ons that you really need and which are cheaper elsewhere.
6. Rolling negative equity forward Being " " on the car loan is when you have more debt on your vehicle than the value of it. Lenders may allow you to roll over that negative equity into a new loan but this is not a prudent decision for your financial situation. If you do, you'll be charged interest on your previous and current car. And if you were upside down at the time of your trade-in most likely you'll be again. Instead of rolling negative equity into the new loan Try it before taking out the new loan. You could also pay off the negative equity prior to transferring it with the dealer to avoid paying excess interest. Key takeaway
Do not roll any negative equity in your car forward. Instead, you should pay off the full amount of your previous loan as you can or pay the difference when you trade in your vehicle.
The most important aspect to success when applying for a car loan is preparedness. This includes negotiating the monthly payment, understanding your credit rating, choosing the right term length, knowing the add-on expenses and avoiding rolling across negative equity. Make sure to be aware of potential mistakes as you negotiate, and with the luck of the draw, you'll leave with a savings 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 borrowing money to buy cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to manage their finances with precise, well-studied information that breaks down otherwise complex topics into manageable bites.
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