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 smarter financial decisions by offering interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare information for free and help you make sound 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 site are from companies that pay us. This compensation could affect how and when products are featured on this website, for example, for example, the order in which they appear within the listing categories, except where prohibited by law for our mortgage home equity, mortgage and other home loan products. But this compensation does not influence the information we publish, or the reviews you see on this site. We do not contain 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 ins and outs of securely borrowing money to buy cars. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain confidence to manage their finances with clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces. The Bankrate guarantee

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You have money questions. Bankrate can help. Our experts have been helping you manage your money for over four years. We are constantly striving to provide consumers with the expert advice and tools needed to make it through life’s financial journey. Bankrate adheres to a strict code of conduct , therefore you can be confident that our information is trustworthy and accurate. Our award-winning editors and journalists create honest and accurate content that will help you make the right financial choices. The content we create by our editorial team is objective, factual and uninfluenced by our advertisers. We’re open regarding how we’re in a position to provide quality information, competitive rates and useful tools for you by explaining how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products and services or through you clicking certain links posted on our site. So, this compensation can impact how, where and in what order items appear within listing categories in the event that they are not permitted by law. We also offer mortgage, home equity and other home loan products. Other factors, like our own website rules and whether a product is available within your area or at your own personal credit score could also affect how and where products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include information about each credit or financial products or services. If you’re looking to save money on your next car purchase, you’ll have to do more than just make a great bargain with the salesperson about the . An error when buying an auto loan could result in a loss of money and erase the savings negotiated on the purchase price. Unfortunately, it’s not all that common, particularly among those with credit scores that are high. A study by the Federal Reserve showed that 3 percent of super-prime and prime customers had auto loans with an APR of 10 percent or more that is more than twice the rate they would normally pay for their credit scores. Doing not shop around to find the most affordable deal in auto loan financing one of the mistakes you should avoid. Here are some other mistakes to avoid if you’re looking to secure the best price possible. 1. Not shopping around is an easy and convenient way to secure an auto loan, but it also comes at an added cost. Dealers often mark their rates up by a few percent to ensure they earn. Before you visit the dealership look around and visit credit unions or banks. Doing so will give you an idea of the interest rates you can get for your credit score , and ensure you get the most competitive rate. Be aware that the requirements of banks may be more strict as compared to credit unions’, however, they might offer lower rates than those you get at the dealership. If it’s your first experience buying a car, look for programs that offer financing for first-time buyers in credit unions. When you’ve been preapproved for an loan, you can bargain with the dealer more efficiently. After all, if the dealer isn’t willing to beat the rate you already have, you don’t have to rely on their financing in order to obtain the car you want. What’s the most important takeaway

Preapproval can ensure you receive the most competitive rate, and will give you the leverage to bargain.

2. Negotiating the monthly installment instead of the purchase price Although the monthly payment for your vehicle loan is important — and you should know it ahead of time each month, it shouldn’t be the basis of your . After you’ve volunteered, the each month’s car loan amount will inform the dealer what you’re willing to invest. The salesperson might also try to hide other costs, like the higher interest rate and add-ons. They could also offer you on a longer time frame for repayment, which could help keep your monthly payments within your budget but can cost you more overall. In order to avoid that, you should negotiate the price of your vehicle’s purchase and then each time instead of focusing on the monthly payment. The most important thing to remember is

Never purchase a car based only on the monthly payments; the dealer could use that number to place negotiations at a standstill or even upsell you.

3. Let the dealer determine your creditworthiness. Creditworthiness determines the rate of interest you pay one who has good credit scores can get an improved car loan rate than someone with a low score. By reducing just one percentage point of interest from a $15,000 vehicle loan over 60 months could save hundreds of dollars in interest over the course of the loan. Understanding your score on credit prior to time puts you in the driver’s seat in negotiations. With it, you will be aware of the rate you should expect — and if your dealer is trying to charge too much you or lie about what you qualify for. What is a bad APR for an auto loan? New auto loans have an APR of 6.07 per cent in 2022’s fourth quarter, according to data from . Credit scores of people with good credit qualify for rates of around 3.84 percent, whereas those having bad credit had an average new automobile rate at 12.93 percent. Used car rates were higher than 10.26 percent across all credit scores. The highest rate was 20.62 percent. Therefore, a “bad” APR for a car is on the higher range of these numbers. In law, loans cannot have an interest rate over 36 percent. Look for a lender who offers an average rate for your credit score, or higher. The most important thing to remember is

Shop around with many different lenders to get an idea of the estimated interest rates. You can do whatever you can to improve your credit score before going to the dealership.

4. Do not choose the correct term length range from 24-84 month. More lengthy terms can offer attractive and lower monthly cost of payments. However, the longer, the higher the interest you’ll have to pay. Some lenders also charge a higher interest rate in the event you select an extended repayment period since there’s a greater chance you’ll end up upside-down on the loan. To decide which is the best option for you, take a look at your priorities. For instance, if you’re the kind of driver interested in getting driving a new vehicle every few months, being trapped in an extended loan is probably not the right choice for you. On the other hand, if you have the funds to pay for your car, a longer term might be the only way you can afford your vehicle. Make use of a tool to analyze the monthly cost of your car and determine which option is best for you. What you should take away from this

A short-term loan is likely to 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 higher interest costs over time.

5. Finance the cost of additional items Dealerships earn from — especially aftermarket products sold by the finance or insurance office. If you’re looking for an insurance policy or gaps insurance policy, those items can be purchased for less from sources outside the dealership. Wrapping these add-ons into the financing you choose to use will result in more expense over the long term, since you’ll be charged interest on these items. Be sure to inquire about every charge you aren’t sure about to avoid unnecessary additions to the purchase price. If there’s an extra that you’re really interested in then pay for it out of your pocket. It is better to check whether it’s available at a different dealership at a lower cost. The purchase of a third party is usually cheaper than aftermarket products such as extended warranties and . Most important takeaway

In the long term, financing add-ons will result in more interest being paid overall. Prepare yourself for negotiations by knowing what add-ons are essential and which you can find cheaper in other places.

6. The process of rolling forward negative equity ” ” on a car loan is the case when you owe more money on your car than what it’s worth. Some lenders will allow you to roll over that negative equity into a new loan but 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. And if you were upside-down on your last trade-in, chances are you will be the next time around. Instead of rolling your negative equity into the new loan Try it before making the move to take out the new loan. You can also repay your equity upfront with the dealer to keep from having to pay excessive interest. The most important thing to remember

Don’t put negative equity on your vehicle forward. Instead, you should pay off the full amount of your previous loan as you can, or pay the difference when you sell your vehicle.

The most important aspect to success when you take out an auto loan is preparedness. This includes negotiating the monthly installment as well as knowing your credit score, choosing the appropriate duration, making sure you are aware of additional expenses and avoiding rolling across negative equity. Keep potential mistakes in mind when you negotiate. With luck, you will walk away with saved money and time. Learn more


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 purchase a car. 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 manage their finances through providing concise, well-researched and well-researched content that breaks down complicated subjects into bite-sized pieces.

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