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 choices by providing you with interactive tools and financial calculators that provide original and accurate content. This allows you to conduct your own research and compare data for free - so that you can make financial choices without a doubt. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site are from companies that pay us. This compensation could affect how and where products are displayed on the site, such as the sequence in which they appear in the listing categories and other categories, unless 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 provide, or the reviews that appear on this website. We do not cover the universe of companies or financial offers that may be available to you. My Ocean Production/Shutterstock
5 minutes 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 cars. The article was 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 control their finances through providing clear, well-researched information that breaks down otherwise complex issues into digestible chunks. The Bankrate promises
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They ensure that what we write ensures that everything we publish is accurate, objective and trustworthy. The loans journalists and editors concentrate on the points consumers care about the most -- the various kinds of lending options and the most competitive rates, the top lenders, how to repay debt, and more -- so you'll feel safe making a decision about your investment. Editorial integrity
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If you have questions about money. Bankrate can help. Our experts have helped you understand your finances for more than four years. We strive to continuously provide consumers with the expert guidance and the tools necessary to be successful throughout their financial journey. Bankrate adheres to a strict code of conduct standard of conduct, which means that you can be sure that our content is honest and reliable. Our award-winning editors, reporters and editors create honest and accurate content to help you make the right financial decisions. The content we create by our editorial team is objective, factual and is not influenced through our sponsors. We're open about the ways we're able to bring quality content, competitive rates, and useful tools to our customers by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated for the placement of sponsored products and, services, or when you click on specific links on our site. So, this compensation can impact how, where and when the items appear in listing categories, unless it is prohibited by law for our mortgage, home equity and other products for home loans. Other factors, such as our own rules for our website and whether or not a product is offered in the area you reside in or is within your personal credit score can also impact 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 every financial or credit item or product. If you are looking to save money for your next vehicle purchase, you'll have to do more than make a favorable bargain with the salesperson about the . A mistake when taking out an auto loan could result in a loss of money and wipe out the savings you bargained for on the purchase price. Unfortunately, it's not all that common, particularly among people with good credit scores. A report from the Financial Times revealed three percent of prime and super-prime customers received auto loans that had an APR of more than 10 percent this is nearly double the rate they would normally pay for those with credit scores. Not shopping for the most affordable deal in auto loan financing one mistake you want to avoid. Here are some other mistakes to avoid if you want to land the best price possible. 1. Not shopping around is an easy and convenient way to get an auto loan, but it also comes at an added cost. Dealers usually mark up their rates by a couple percent to ensure they profit. Before going to the dealer look around and visit financial institutions or credit unions. Doing this will give you an idea of the interest rates available for your credit score and make sure you are getting the most competitive rate. Be aware that the requirements of banks may be stricter than credit unions' however they can offer lower rates than those you get at the dealership. If it's your first experience purchasing a vehicle, look 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 a loan then you can negotiate with the dealership more efficiently. If the dealer doesn't beat the rate you already have, you don't have to count on their financing to get the car you've always wanted. What's the most important takeaway
Preapproval can ensure you receive the best price and give you leverage to bargain.
2. Negotiating the monthly payment instead of the purchase price. Although the monthly installment on your vehicle loan is crucial -- and you must know in advance every month -- it shouldn't form the foundation of your . After you've volunteered, the each month's car loan amount will inform the dealer what you're willing to pay. The salesperson might also try to conceal other costs, such as a higher interest rate and additional charges. They could also offer you on a longer repayment timeline, which will help keep your monthly payments within your budget, but will cost you more overall. In order to avoid that, negotiate the vehicle's purchase price and each instead of focusing solely on the monthly installment. Important takeaway
Never purchase a car based on the monthly installment alone as the dealer might make use of that number to put negotiations at a standstill or upsell you.
3. The dealer should be able to define your creditworthiness Your creditworthiness determines your interest rate A borrower who has an excellent credit score is eligible for a higher car loan rate than one with a lower score. Reducing one percent of interest on a $15,000 car loan over 60 months could save hundreds of dollars in interest paid throughout the duration of the loan. Being aware of your credit rating prior to time puts you in the driver's seat in negotiations. With it, you will know the price you can expect -- and if the dealer is trying to charge too much you or deny what you're eligible for. What is an unacceptable APR for the 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 of around 3.84 percent, while those with bad credit had an average new automobile rate at 12.93 percent. Rates for used cars were higher -- 10.26 percent across credit scores. The highest rate was 20.62 percent. Thus the "bad" annual percentage rate for car is on the higher portion of these figures. The law states that loans can't have an APR over 36 percent. Seek a lender who offers the average interest rate on your score, or better. Key takeaway
Explore a variety of lenders to determine the approximate interest rates you can expect to pay and make any necessary steps to boost your credit score before heading to the dealer.
4. Not choosing the right term length ranges between 24 and 84 months. More lengthy terms can offer attractive low costs. But the longer, the higher the interest you'll have to pay. Some lenders also charge higher interest rates if you opt for an extended repayment term because there's a greater risk you'll be upside-down with the loan. To decide which is the most suitable option for you, take a look at your needs and priorities. If, for instance, you are the type of person who wants to get driving an updated vehicle every couple of months, then being enslaved by the long-term loan may not be the best option 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 option to ensure to afford your vehicle. Utilize a calculator to determine your monthly payment and decide the best option for you. Key takeaway
A short-term loan will cost you less overall in interest, but it will also have higher monthly payments; a long-term loan will come with lower monthly payments , but will have higher interest costs over the course of time.
5. Financing the cost of add-ons Dealerships profit from -- specifically aftermarket products sold through Finance and Insurance office. If you're in the market for the gap insurance products are available for less from outside sources. The addition of these items to your financing will also cost you more in the long run because you'll have to pay interest on them. Examine every cost that you don't know about to prevent unnecessary charges to the cost of your purchase. If there's an extra you really want and can't afford, you should pay it out of pocket. Better yet, check whether it's available at a different dealership at a lower cost. Buying from a third party is usually cheaper than aftermarket items such as extended warranties and . Most important takeaway
In the long run the financing add-ons can lead to more interest paid overall. Prepare yourself for negotiations by knowing the add-ons that you really need and which are cheaper in other places.
6. Moving negative equity forward " " on a car loan is the case when you owe more money on your car than what it's worth. Lenders may allow you to roll over that negative equity into a new loan however it's not a wise decision for your financial situation. If you do this, you'll have to pay interest on the current and prior vehicle. If you were upside-down on your last trade-in, chances are you will be again. Instead of incorporating negative equity into the new loan Try it before taking out the new loan. You could also pay off the negative equity upfront to the dealer in order to keep from having to pay excessive interest. The most important thing to remember
Don't put negative equity on your vehicle forward. Instead, pay off the full amount of your previous loan as you can, or take the amount that is left when you sell your car.
The bottom line The key to success when applying for a car loan is preparing. This means negotiating the monthly payment, understanding your credit rating, selecting the right time frame, and being aware of add-on costs and avoiding carrying into negative equity. Be aware of any mistakes that could occur while you negotiate. If you do, with luck, you'll be able to save money and time. Find out more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ways and pitfalls of borrowing money to buy an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers get the confidence to take control of their finances by providing well-researched, clear details that cut complex topics into manageable bites.
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