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 aim is to assist you make smarter financial decisions by offering interactive tools and financial calculators as well as publishing objective and original content, by enabling you to conduct research and compare data for free - so that you can make financial decisions with confidence. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this website are provided by companies that compensate us. This compensation may impact how and where products are displayed on this site, including such things as the order in which they appear within the listing categories, except where prohibited by law. Our mortgage or home equity products, as well as other home loan products. However, this compensation will have no impact on the information we publish, or the reviews appear on this website. We do not include the vast array of companies or financial deals 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 a specialist in helping readers with the ins and outs of securely borrowing money to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to control their finances by providing precise, well-researched and well-written information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate promise
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If you have questions about money. Bankrate has the answers. Our experts have been helping you manage your money for more than four decades. We strive to continuously give our customers the right 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 information is trustworthy and reliable. Our award-winning editors, reporters and editors provide honest and trustworthy content that will help you make the right financial choices. The content we create by our editorial team is factual, objective and is not influenced by our advertisers. We're honest regarding how we're capable of bringing high-quality information, competitive rates and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or through you clicking specific links on our website. This compensation could impact how, where and in what order items appear in listing categories and categories, unless it is prohibited by law. We also offer mortgage or home equity products, as well as other products for home loans. Other factors, such as our own website rules and whether or not a product is available in your area or at your self-selected credit score range can also impact how and where products appear on this website. Although we try to offer a wide range offers, Bankrate does not include specific information on each credit or financial product or service. If you want to save money on the next vehicle purchase, you'll need to do more than strike a good bargain with the salesperson about the . An error when buying a could cost you money and erase any savings that you have negotiated regarding the cost of the car. Unfortunately, it's not all that common, particularly among those with credit scores that are high. An investigation from revealed the fact that 3 percent of super-prime and prime customers had auto loans with APRs of more than 10 percent, which is more than double the average rate of the credit score of their borrowers. Don't shop around for the best deal in auto loan financing one of the mistakes to avoid. Here are some other mistakes to avoid if you want to get the best price possible. 1. Avoiding shopping around is an easy and practical way to obtain an auto loan however, it costs extra. Dealers typically mark their rates up by a couple of percent to ensure they earn. Before going to the dealer look around and visit banks or credit unions. Doing so will give you an idea of the rates that are available for your credit score , and ensure you get the most competitive rate. Keep in mind that banks' requirements may be more stringent as compared to credit unions', however, they might offer lower rates than those you get at the dealership. If it's your first experience purchasing a car, search at financing options that are designed for buyers who are first-time buyers. These can be found at credit unions. When you've been preapproved for a loan then you can bargain with the dealer more effectively. After all, if the dealer doesn't beat the rate you currently have, you don't have to depend on their financing to purchase the car you want. What's the most important takeaway
The preapproval process will ensure that you receive the most competitive rate and give you leverage to negotiate.
2. Negotiating the monthly installment rather than the purchase price. Although the monthly installment on your vehicle loan is vital -- and should be know it ahead of time each month, it shouldn't form the foundation of your . Once volunteered, a each month's car loan amount will inform the dealer how much you're willing to invest. The salesperson could also try to conceal other costs, like the higher interest rate and additional charges. They could also offer you on a more lengthy time frame for repayment, which could keep that monthly payment within your budget, but could increase the overall cost. For this reason, you should negotiate the purchase price of the car and each instead of focusing on the monthly installment. Key takeaway
Never purchase a car based on the monthly payment alone; the dealer could use that number to place negotiations on hold or upsell you.
3. Let the dealer determine your creditworthiness. Your creditworthiness is the basis for your interest rate one who has an excellent credit score is eligible for a better vehicle loan rate than one with a low score. Reducing just one percentage point interest from a $15,000 vehicle loan over 60 months can be a huge savings in the interest over the course of the loan. Knowing your credit score prior to time puts you in the driver's seat when it comes to negotiations. By knowing your credit score, you'll know what rate you can anticipate -- and whether your dealer is trying to overcharge you or misrepresent the amount you are eligible for. What is a bad APR for a car loan? New auto loans have an APR of 6.07 percent in the fourth quarter of 2022, according to figures from . The credit score of those with excellent credit was eligible for rates of around 3.84 percent, whereas those who had bad credit had an average new automobile rate of 12.93 percent. Rates for used cars were higher than 10.26 percent across credit scores. It was also a record-breaking 20.62 percent. Thus the "bad" Annual percentage ratio for a vehicle would be on the upper portion of these figures. Legally, loans aren't allowed to have an annual percentage rate that is greater than 36 percent. Seek an lender that will offer you an average rate for your credit score or higher. Key takeaway
Explore a variety of lenders to determine your estimated interest rates and do whatever you can to boost your credit score prior to heading to the dealer.
4. The wrong term to choose length can mean a gap of 24 to 84 months. Longer terms may offer tempting and lower monthly payments. However, the longer the term , 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 higher chance that you'll be upside-down with the loan. To determine which is the most suitable option for you, take a look at your needs and priorities. If, for instance, you are the type of driver who is looking to get driving an updated vehicle every couple of months, being trapped in the long-term loan may not be the best option for you. However in the event that you're on a limited budget, a longer term might be the only option to afford your car. Make use of a tool to analyze the cost of your monthly payments and choose which option is best for you. What you should take away from this
A short-term loan will cost 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 cost of interest over time.
5. Finance the cost of added-ons Dealerships make money from -- particularly aftermarket products sold via the Finance and Insurance department. If you want an or gap insurance, these products are offered for less from outside sources. Wrapping these add-ons into your financing will also result in more expense over the long term as you'll be charged interest on these items. Be sure to inquire about every charge you don't understand to avoid unnecessary additions to the 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. Better yet, check if it's available outside the dealership for less. The purchase of a third party is usually cheaper than aftermarket items, extended warranties and . Key takeaway
In the long term the financing add-ons can increase the amount of interest you pay in the end. Come prepared to negotiations knowing what add-ons are essential and which are cheaper elsewhere.
6. Rolling negative equity forward Being " " on the car loan is the case when you owe more money on your vehicle than what it's worth. Lenders may allow you to carry that negative equity into the new loan, but it's not a wise choice for financial reasons. If you do this, you'll be charged interest on your previous and current vehicle. And if you were in the red when you traded in your last car it is likely that you will be the next time around. Instead of rolling negative equity into the new loan first, consider taking out the new loan. You can also pay off the negative equity upfront to the dealer to keep from having to pay excessive interest. What's the most important takeaway
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 pay the difference when you trade in your vehicle.
The bottom line The key to success when taking out an auto loan is preparing. This includes negotiating the monthly payment as well as being aware of your credit scores, selecting the appropriate term length, being aware of add-on expenses and avoiding the risk of rolling into negative equity. Keep potential mistakes in mind when you negotiate. With the right luck, you'll leave with a savings and time. Learn more
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the details 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 dedicated to helping readers gain the confidence to control their finances with concise, well-researched and well-researched content that breaks down complicated subjects into bite-sized pieces.
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