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 better financial decisions by offering interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct research and compare data at no cost – so you can make financial decisions 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 products that are advertised on this website are provided by companies that compensate us. This compensation could affect how and when products are featured on the site, such as the order in which they appear in the listing categories, except where prohibited by law. This applies to our mortgage or home equity products, as well as other home lending products. But this compensation does not influence the information we publish, or the reviews you see on this site. We do not include the vast array of companies or financial offers that may be available to you. My Ocean Production/Shutterstock
5 min 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 in navigating the ways and pitfalls of borrowing money to buy cars. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers gain the confidence to manage their finances by providing concise, well-researched and well-researched content that breaks down otherwise complex subjects into bite-sized pieces. The Bankrate guarantee
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The preapproval process will ensure that you get the best price and give you leverage to bargain.
2. Negotiating the monthly payment instead of the purchase price Although the monthly payment on your car loan is vital — and you must know it ahead of time each month — it shouldn’t be the basis of your . When you’ve made it clear, a monthly car loan amount informs the dealer how much you are willing to spend. The salesperson could also try to hide other costs, for example, a higher interest rate and additional charges. They may also try to sell you on a more lengthy payment timeframe, which can help keep your monthly payments within your budget but cost you more overall. To avoid this, you should negotiate the price of your vehicle’s purchase and each instead of focusing on the monthly installment. Important takeaway
Never purchase a car based only on the monthly payments; the dealer could utilize that information to stop negotiations at a standstill or to upsell you.
3. Let the dealer determine your creditworthiness. Your creditworthiness is the basis for your interest rate, and a borrower with an excellent credit score is eligible for a higher vehicle loan rate than someone with a lower score. Reducing one percent of interest on a $15,000 car loan over a period of 60 months could be a huge savings in the interest over the life of the loan. Knowing your credit score prior to time puts you in control in negotiations. By knowing your credit score, you’ll know what rate you can anticipate — and whether your dealer is trying to charge too much you or deny what you are eligible for. What is the worst APR for the car loan? New auto loans were at 6.07 percentage in the 4th quarter 2022, according to figures from . Credit scores of people with good credit qualify for rates as low as 3.84 percent, whereas those having bad credit had an average new vehicle price of 12.93 percent. Rates for used cars were higher — 10.26 percent across credit scores. And the was a sky-high 20.62 percent. So it’s a “bad” annual percentage rate for a vehicle would be on the upper range of these figures. In law, loans can’t have an APR of more than 36 percent. Seek a lender that offers you the average interest rate on your score or better. The most important thing to remember is
Check out a variety of lenders to find out the approximate interest rates you can expect to pay and take any steps to boost your credit score before heading to the dealer.
4. Do not choose the correct term length can be a challenge. The range of durations is between 24 and 84 months. The longer term may be tempting with, lower payments. However, the longer the term , the more the interest you’ll have to pay. Some lenders also charge a higher interest rate if you opt for an extended repayment period since there’s a higher chance that you’ll be upside-down with the loan. To decide which is the best option for you, think about your priorities. If, for instance, you’re the kind of driver interested in getting driving the latest car every few months, being trapped in an extended loan is probably not the right choice for you. On the other hand If you’re on an extremely tight budget, a longer term might be the only option to ensure you can afford your car. Utilize a calculator to determine the cost of your monthly payments and choose the best option for you. What you should take away from this
A short-term loan will 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 will have higher interest costs over time.
5. Finance the cost of additional items Dealerships earn from — particularly products that are sold to the finance and insurance department. If you’re in the market for the gap insurance items are available for less from sources outside the dealership. The addition of these items to the financing you choose to use will result in more expense in the long run, since you’ll be charged interest on these items. Examine every cost that you don’t know about to prevent unnecessary charges to your 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. If you want to make sure, ask if it’s available outside the dealership at a lower cost. The purchase of a third party is typically cheaper for products that are aftermarket such as extended warranties and . Key takeaway
In the long run the financing add-ons can lead to more interest paid in the end. 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 situation where you have more debt on your vehicle than what it’s worth. Lenders may allow you to carry that negative equity into a new loan however this is not a prudent decision for your financial situation. If you do, you will pay interest on the current and prior vehicle. And if you were upside-down at the time of your trade-in it is likely that you will be in the same position again. Instead of incorporating negative equity into the new loan first, consider taking out the new loan. You could also pay off the negative equity in advance with the dealer to keep from having to pay excessive interest. The most important thing to remember
Don’t roll negative equity in your car forward. Instead, you should pay off as much of the old loan as you can, or take the amount that is left when you trade in your vehicle.
The most important aspect to success when you take out a car loan is being prepared. This includes negotiating the monthly installment and being aware of your credit scores, selecting the right duration, making sure you are aware of additional expenses and avoiding the risk of rolling across negative equity. Make sure to be aware of potential mistakes as you negotiate. With luck, you will be able to save money and time. Find out more
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 ways and pitfalls of taking out loans to purchase an automobile. Written 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 achieve confidence in taking control of their finances by giving clear, well-studied information that breaks down otherwise complicated subjects into bite-sized pieces.
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