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 offering interactive tools and financial calculators as well as publishing objective and original content, by enabling you to conduct your own research and compare information at no cost and help you make sound financial decisions. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that appear on this site come from companies that pay us. This compensation may impact how and when products are featured on the site, such as such things as the sequence in which they appear in the listing categories in the event that they are not permitted by law. Our mortgage or home equity products, as well as other products for home loans. However, this compensation will affect the information we publish, or the reviews appear on this website. We do not include the entire universe of businesses or financial offers that may be available to you. My Ocean Production/Shutterstock
5 min read Published March 02, 2023.
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert with the ways and pitfalls of borrowing money to buy an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are enthusiastic about helping readers gain confidence to take control of their finances with precise, well-researched and well-written information that breaks down complicated topics into bite-sized pieces. The Bankrate guarantee
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If you have questions about money. Bankrate can help. Our experts have helped you understand your money for over four decades. We continually strive to provide consumers with the expert guidance and the tools necessary to make it through life's financial journey. Bankrate follows a strict policy, therefore you can be confident that our content is honest and reliable. Our award-winning editors and reporters produce honest and reliable content to help you make the best financial decisions. Our content produced by our editorial staff is objective, factual and uninfluenced from our advertising. We're honest about the ways we're capable of bringing high-quality content, competitive rates, and helpful tools to our customers by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for placement of sponsored products and services, or when you click on certain hyperlinks on our website. This compensation could influence the manner, place and when products are listed and categories, unless it is prohibited by law for our mortgage, home equity and other home lending products. Other elements, such as our own rules for our website and whether or not a product is available in the area you reside in or is within your personal credit score may also influence the manner in which products appear on this website. Although we try to offer an array of offers, Bankrate does not include details about every credit or financial product or service. If you're looking to save money for your next car purchase, you will need to do more than just make a great bargain with the salesperson about the . An error when buying a could cost you money and erase the savings negotiated on the purchase price. Unfortunately, it's not all the time, particularly for borrowers with high credit scores. A study by the Federal Reserve showed the fact that 3 percent of super-prime and prime consumers received auto loans with APRs of more than 10 percent this is more than twice the average rate of the credit score of their borrowers. Don't shop around for the best deal on auto financing is just one of the mistakes to avoid. There are other mistakes to be aware of if you wish to get the best price possible. 1. It's an easy and convenient way to get an auto loan however it costs extra. Dealers often mark up their rates by a few percentage points to ensure they earn. Before going to the dealer take a look at other options and credit unions or banks. Doing so will provide you with an understanding of the interest rates you can get for your credit score , and ensure you get the best deal. Be aware that the requirements of banks may be more strict that credit unions', but they can provide better rates than what you get at the dealership. If this is your first time purchasing a car, search at financing options that are designed for buyers who are first-time buyers. These can be found at credit unions. After you've been approved for the loan and you're able to bargain with the dealer more efficiently. If the dealership isn't willing to beat the rate you currently have, you don't need to count on their financing in order to obtain the car you've always wanted. What's the most important takeaway
The preapproval process will ensure that you receive the most competitive rate and give you leverage to bargain.
2. Negotiating the monthly payment instead of the purchase price While the monthly installment on your car loan is crucial -- and should be know it ahead of time each month -- it shouldn't be the basis of your . After you've volunteered, the month-long car loan amount will inform the dealer how much you are willing to spend. The salesperson might also try to conceal other costs, such as a higher interest rate and other fees. They may also try to sell you on a longer payment timeframe, which can allow you to keep the monthly installment within your budget, but could cost you more overall. To avoid this, negotiate the vehicle's purchase price and each instead of focusing on your monthly payment. Key takeaway
Never purchase a car based only on the monthly payments and the dealer may use that number to place negotiations on hold or even upsell you.
3. The dealer should be able to define your creditworthiness Your creditworthiness determines the rate of interest you pay A borrower who has a high qualifies for the best vehicle loan rate than one with a lower score. Shaving just one percentage point interest on a $15,000 car loan over 60 months could reduce the amount of interest over the course that the loan. Being aware of your credit rating ahead of time puts you in control when it comes to negotiations. With it, you will know what rate you can anticipate -- and whether your dealer is trying to overcharge you or deny the loan you're eligible for. What is an unacceptable APR for the car loan? New auto loans have an APR of 6.07 per cent in 2022's fourth quarter according to figures from . People with excellent credit qualified for rates as low as 3.84 percent, whereas those with bad credit had an average new car price that was 12.93 percent. Used car rates were higher -- 10.26 percent across credit scores. And the was a sky-high 20.62 percent. So it's a "bad" APR for a car would be on the upper range of these figures. Legally, loans can't have an APR that is greater than 36 percent. Find an lender that will offer you an average rate for your credit score, or higher. Key takeaway
Check out a variety of lenders to get an idea of your expected interest rates and make any necessary steps to boost your credit score prior to going to the dealer.
4. Not choosing the right term length can mean a gap of between 24 and 84 months. The longer term may be tempting with low costs. However, the longer, the higher interest you'll pay. Certain lenders will also charge higher interest rates if you opt for an extended repayment timeframe because there's a greater chance you'll end up upside-down on the loan. To determine which is the best choice for you, take a look at your needs and priorities. For example, if you're the kind of driver who is looking to get behind the wheel of an updated vehicle every couple of months, being trapped in the long-term loan may not be the best option for you. On the other hand If you're on the funds to pay for your car then a longer-term contract might be the only option you'll be able to pay for your car. Make use of a tool to analyze your monthly payment and decide the best option for you. Key takeaway
A short-term loan is likely to cost less interest in the long run but will have high monthly payments. A longer-term loan will offer smaller monthly payments, however it will cost you more cost of interest over time.
5. Financing the costs of added-ons Dealerships make money from -- particularly aftermarket items that are offered by the finance or insurance department. If you're looking for an insurance policy or gap insurance, these items can be purchased at a lower price from outside sources. Incorporating these extras into your financing will also increase the cost over the long term as you'll be charged interest on these items. Examine every cost that you don't know about in order to avoid unnecessary costs to your purchase price. If there is an add-on you truly want, pay for it out-of-pocket. If you want to make sure, ask whether it's sold outside of the dealership at a lower cost. Buying from a third party is often cheaper for aftermarket products such as extended warranties and . Key takeaway
In the long run adding financing options will lead to more interest paid in the end. Be prepared for negotiations and know which add-ons you truly need and which are cheaper elsewhere.
6. Rolling negative equity forward Being " " on a car loan is the case when you owe more money on your vehicle than it is worth. Some lenders will allow you to roll over that negative equity into an additional loan, but it's not a wise choice for financial reasons. If you do, you will pay interest on both your current and previous car. 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, try before taking out the new loan. You could also repay your equity in advance to the dealer to keep from having to pay excessive interest. The most important thing to remember
Don't roll negative equity from your vehicle forward. Instead, you should pay off the full amount of your previous 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 a car loan is preparedness. This means negotiating the monthly payment as well as understanding your credit rating, deciding on the right duration, knowing the add-on costs and avoiding the risk of rolling into negative equity. Be aware of any mistakes that could occur as you negotiate. If you do, with the right luck, you'll 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 is a specialist in helping readers with the ways and pitfalls of borrowing money 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 confidence to control their finances through providing clear, well-researched information that breaks down otherwise complex subjects into bite-sized pieces.
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