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 original and impartial content, by enabling users to conduct research and compare information without cost, so that you can make financial decisions confidently. Bankrate has agreements with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that are advertised on this site are from companies who pay us. This compensation may impact how and when products are featured on the site, such as the sequence in which they appear in the listing categories and other categories, unless prohibited by law. This applies to our mortgage, home equity and other products for home loans. This compensation, however, does have no impact on the information we provide, or the reviews you see on this site. We do not contain the universe of companies or financial deals that could 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 assisting readers in navigating the ins and outs of securely borrowing money to buy a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping their readers feel confident to manage their finances through providing clear, well-researched information that breaks down complicated 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 finances for more than four decades. We continually strive to provide consumers with the expert advice and tools required to succeed throughout life’s financial journey. Bankrate adheres to strict standards standard of conduct, which means that you can be sure that our content is honest and reliable. Our award-winning editors and journalists create honest and accurate content to help you make the right financial decisions. The content created by our editorial team is objective, factual and is not influenced from our advertising. We’re honest about the ways we’re capable of bringing high-quality content, 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 receive compensation for the promotion of sponsored goods and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may affect the way, location and in what order the products are listed within categories, with the exception of those the law prohibits it for our mortgage and home equity products, as well as other home lending products. Other factors, like our own website rules and whether the product is available within your region or within your own personal credit score can also impact the manner in which products are featured on this site. While we strive to provide an array of offers, Bankrate does not include information about each credit or financial item or product. If you’re looking to save money on the next vehicle purchase, you’ll require more than make a favorable deal with the salesperson on the . A mistake when taking out an auto loan could result in a loss of money and erase the savings negotiated on the purchase price. However, it’s not that uncommon, especially among those with credit scores that are high. A study by the Federal Reserve showed the fact that 3 percent of super-prime and prime consumers were granted auto loans with APRs of 10 percent or more, which is more than double the average rate for their credit scores. Doing not shop for the lowest price on auto financing is just one error you need to avoid. Here are some other mistakes to be aware of if you wish to get the best deal possible. 1. Not shopping around is an easy and convenient way to get a car loan however, it comes at an added cost. Dealers usually mark their rates up by a few percent to ensure they make money. Before visiting the dealership take a look at other options and financial institutions or credit unions. Doing this will provide you with an understanding of the interest rates available for your credit score and ensure that you receive the most competitive rate. Keep in mind that banks’ requirements may be stricter than credit unions’, but they may offer better rates than you’ll find at the dealership. If this is your first time buying a car, look for financing programs for first-time buyers in credit unions. Once you are preapproved for a loan then you can deal with the dealership more efficiently. If the dealer doesn’t match the rate you already have, you don’t have to depend on their financing to purchase the car you’ve always wanted. The most important thing to remember is
Preapproval will guarantee you get the most competitive rate and give you leverage to negotiate.
2. Negotiating the monthly installment rather than the purchase price While the monthly payment for your vehicle loan is important and should be know in advance every month — it shouldn’t be the sole basis of your . When you’ve made it clear, a each month’s car loan amount tells the dealer how much you are willing to spend. The salesperson could also try to hide other costs, such as a higher interest rate and additional charges. They could also offer you on a longer time frame for repayment, which could help keep your monthly payments within your budget but increase the overall cost. In order to avoid that, you should negotiate the price of your vehicle’s purchase and the price of each, instead of focusing on the monthly payment. Important takeaway
Don’t buy a car based on the monthly installment alone and the dealer may utilize that information to stop negotiations on hold or to upsell you.
3. Let the dealer determine your creditworthiness Your creditworthiness determines the rate of interest you pay, and a borrower with a high qualifies for a higher vehicle loan rate than someone who has a low credit score. Shaving one percent of interest from a $15,000 vehicle loan over a period of 60 months could save hundreds of dollars in interest over the life of the loan. Understanding your score on credit in advance of time puts you in the driver’s seat in negotiations. With it, you will know the price you can be expecting — and also if the dealer is trying overcharge you or lie about the amount you qualify for. What is a bad APR for the car loan? New auto loans have an APR of 6.07 percent in the fourth quarter of 2022 according to data from . The credit score of those with excellent credit was eligible for rates around 3.84 percent, while people having bad credit had an average new automobile price at 12.93 percent. Rates for used cars were higher — 10.26 percent across credit scores. And the was a sky-high 20.62 percent. Therefore the “bad” APR for a car is on the higher range of these figures. In law, loans can’t have an APR that is greater than 36 percent. Find a lender that will offer you an APR that is based on an average score or better. What’s the most important takeaway
Shop around with many different lenders to find out the approximate interest rates you can expect to pay and take any steps to improve your credit score before going to the dealership.
4. Do not choose the correct term length ranges from 24 to 84 month. More lengthy terms can offer attractive low cost of payments. But the , the more the interest you’ll have to pay. Some lenders also charge higher interest rates when you choose to take an extended repayment timeframe because there’s a higher chance that you’ll become upside-down on the loan. To determine the best choice for you, take a look at your top priorities. If, for instance, you are the type of driver who is looking to get driving a new vehicle every few months, being trapped in the long-term loan might not be right for you. On the other hand, if you have an extremely tight budget then a longer-term contract might be the only option to afford your car. Make use of a tool to analyze your monthly payment and decide which one is the most suitable for you. The most important thing to remember
A short-term loan will cost you less in interest overall but will have high monthly payments; a long-term loan will have smaller monthly payments, however it will cost you more interest costs over the course of time.
5. Financing the costs of add-ons Dealerships profit from — particularly aftermarket products sold through their finance or insurance office. If you’re looking for an insurance policy or gaps insurance policy, those items are available at a lower price from sources outside the dealership. Incorporating these extras into your financing will also increase the cost in the long run as you’ll be charged interest on them. Be sure to inquire about every charge that you don’t know about to prevent unnecessary charges to your purchase price. If there’s an extra you really want and can’t afford, you should pay it out of pocket. It is better to check whether it’s sold outside of the dealership for less. A third-party purchase is often cheaper for products that are aftermarket such as extended warranties and . Key takeaway
In the long run adding financing options will increase the amount of interest you pay in the end. Come prepared to negotiations knowing which add-ons you truly need and what you can get cheaper elsewhere.
6. Rolling negative equity forward Being ” ” on an auto loan is the situation where you have more debt on your vehicle than what it’s worth. Lenders may allow you to transfer that equity into a new loan, but it’s not a smart choice for financial reasons. If you do this, you’ll have to pay interest on the current and prior car. If you were in the red at the time of your trade-in most likely you’ll be the next time around. Instead of incorporating negative equity into the new loan first, consider making the move to take out the new loan. It is also possible to pay off the negative equity in advance to the dealer in order to save yourself from paying excessive interest. What’s the most important takeaway
Don’t roll negative equity from your vehicle forward. Instead, pay off as much of the old loan as you can, or make the payment when you trade in your vehicle.
The main thing to success when you take out a car loan is preparing. It is about negotiating your monthly installment as well as being aware of your credit scores, choosing the correct time frame, and being aware of add-on charges and not rolling over negative equity. Be aware of any mistakes that could occur as you negotiate. With luck, you’ll be able to save money and time. Find out more
Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ins and outs of securely borrowing money to purchase a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping their readers achieve confidence in taking charge of their finances by giving clear, well-studied facts that break down otherwise complex topics into manageable bites.
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