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 as well as publishing original and impartial content, by enabling you to conduct your own research and analyze information without cost, so that you can make financial decisions without a doubt. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this website are provided by companies that pay us. This compensation could affect how and when products are featured on this website, for example, for example, the sequence in which they appear in the listing categories and other categories, unless prohibited by law. Our mortgage home equity, mortgage and other home lending products. This compensation, however, does have no impact on the content we publish or the reviews that you see on this site. We do not contain the universe of companies or financial deals that could be accessible to you. My Ocean Production/Shutterstock

5 min read Published March 02, 2023

Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in helping readers in navigating the details of taking out loans to purchase a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers feel confident to manage their finances by providing precise, well-researched, and well-researched information that breaks down complicated subjects into bite-sized pieces. The Bankrate guarantee

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If you have questions about money. Bankrate has answers. Our experts have helped you understand your money for over four years. We are constantly striving to provide consumers with the expert guidance and the tools necessary to be successful throughout their financial journey. Bankrate adheres to strict standards policy, which means you can be confident that our content is honest and accurate. Our award-winning editors and reporters produce honest and reliable content that will help you make the best financial decisions. The content we create by our editorial staff is factual, objective, and not influenced by our advertisers. We’re honest regarding how we’re capable of bringing high-quality content, competitive rates and useful tools to you by explaining how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the placement of sponsored products and, services, or through you clicking certain hyperlinks on our site. Therefore, this compensation may influence the manner, place and in what order the products are listed within categories, with the exception of those prohibited by law for our mortgage, home equity and other home loan products. Other elements, 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 the way and place products are listed on this site. We strive to offer the most diverse selection of products, Bankrate does not include specific information on every financial or credit products or services. If you’re looking to save money on the next car purchase, you will have to do more than strike a good deal with the salesperson on the . An error when buying 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 those with credit scores that are high. An investigation from revealed three percent of super-prime and prime consumers received auto loans with an APR of more than 10 percent that is more than twice the rate they would normally pay for those with credit scores. Not shopping for the most affordable deal in auto loan financing just one mistake you want to avoid. Here are some others to avoid if you’re looking to land the most affordable deal. 1. It’s an easy and practical way to obtain a car loan, but it also costs extra. Dealers usually mark up their rates by a couple percent to ensure they make money. Before you visit the dealership take a look at other options and banks or credit unions. Doing this will give you an idea of the interest rates you can get to your credit score and ensure that you receive the most competitive rate. Be aware that banks’ requirements are more strict than credit unions’ however, they might offer lower rates than those you find at the dealership. If it’s your first experience buying a car, search at financing options for first-time buyers at credit unions. When you’ve been preapproved for an loan, you can bargain with the dealer more efficiently. In the end, if the dealership 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’ve always wanted. The most important thing to remember is

Preapproval will guarantee you get the best price and gives you the power to negotiate.

2. Negotiating the monthly payment instead of the purchase price While the monthly payment for your car loan is vital — and you should have it in advance each month, it shouldn’t be the sole basis of your . When you’ve made it clear, a month-long car loan amount informs the dealer what you are willing to spend. The salesperson might also try to conceal other costs, such as an increased interest rate or additional charges. They might also pitch you on a longer repayment timeline, which will allow you to keep the monthly installment within your budget but 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 solely on the monthly installment. Key takeaway

Don’t buy a car based on the monthly payment alone as the dealer might make use of that number to put negotiations at a standstill or upsell you.

3. Letting the dealer define your creditworthiness Your creditworthiness determines your interest rate A borrower who has a high qualifies for a higher car loan rate than someone with a lower score. By reducing only one percentage point of interest from a $15,000 vehicle loan over 60 months could save hundreds of dollars in interest over the life that the loan. Being aware of your credit rating prior to time will put you in control in negotiations. With it, you’ll be aware of the rate you should anticipate — and whether the dealer is trying overcharge you or lie about what you are eligible for. What is the worst APR for the car loan? New auto loans were at 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, while people having bad credit had an average new car price of 12.93 percent. Rates for used cars were higher than 10.26 percent across all credit scores. And the was a sky-high 20.62 percent. Therefore, a “bad” APR for a vehicle would be on the upper end of these numbers. The law states that loans cannot have an interest rate of more than 36 percent. Look for a lender that offers you an average rate for your credit score or higher. The most important thing to remember is

Explore a variety of lenders to find out your estimated interest rates and make any necessary steps to improve your credit score before heading to the dealership.

4. The wrong term to choose length ranges between 24 and 84 months. The longer term may be tempting with, lower payments. But the , the more the interest you’ll have to pay. Some lenders also offer a higher rate of interest in the event you select an extended repayment period since there’s a higher chance that you’ll be upside-down with the loan. To decide which is the most suitable option for you, think about your needs and priorities. If, for instance, you’re the kind of driver interested in getting behind the wheel of the latest car every few months, being stuck in an extended 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 way you can afford your vehicle. Use a to understand the monthly cost of your car and determine which one is the most suitable for you. What you should take away from this

A short-term loan will cost you less overall in interest, but will have high monthly payments; a long-term loan will have lower monthly payments but higher cost of interest over the long term.

5. Finance the cost of add-ons Dealerships profit from — especially aftermarket products offered through their finance or insurance department. If you want an or gaps insurance policy, those items are available for less through sources other than the dealership. Wrapping these add-ons into your financing will also result in more expense in the end, since you’ll be charged interest on them. Examine every cost you aren’t sure about to avoid unnecessary additions to the purchase price. If there’s an extra that you’re really interested in and can’t afford, you should pay it out of pocket. It is better to check whether it’s sold outside of the dealership at a lower cost. Buying from a third party is often cheaper for products that are aftermarket including extended warranties . The most important thing to remember is

In the long term, financing add-ons will increase the amount of interest you pay overall. Come prepared to negotiations knowing what add-ons are essential and which are cheaper in other places.

6. The process of rolling forward negative equity ” ” on the car loan is the case when you owe more money on your vehicle than it is worth. Some lenders will allow you to carry that negative equity into the new loan, but it’s not a smart financial move. If you do, you will pay interest on the current and prior car. And if you were upside down when you traded in your last car it is likely that you will be in the same position again. Instead of rolling negative equity into the new loan Try it before taking out the new one. It is also possible to pay off your negative equity in advance with the dealer to save yourself from paying excessive interest. The most important thing to remember

Don’t roll negative equity from your vehicle forward. Instead, 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 bottom line The key to success when taking out an auto loan is preparedness. It is about negotiating your monthly installment and understanding your credit rating, selecting the correct duration, being aware of add-on costs and avoiding the risk of rolling over negative equity. Make sure to be aware of potential mistakes as you negotiate. With luck, you’ll be able to save money and time. Learn more


The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ways and pitfalls of borrowing money to buy an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping their readers get the confidence to take control of their finances through providing clear, well-researched information that breaks down complex topics into manageable bites.

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