A car purchase involves more than just choosing the one you want and driving it home.
You must also consider how you will pay for it.
This entails borrowing money from a bank or other financial institution for the majority of car buyers.
Experian, a credit reporting agency, estimates that 85% of new car buyers and 53% of used car buyers obtained auto loans to cover the cost of their purchases.
Although car loans appear to be an easy way to cover your car payment, they can be a risky option if done wrong.
The risks range from a losing deal and paying more than the car is worth to getting into serious financial troubles and bankruptcy.
Here are 7 Car loan mistakes you should avoid for a safer and good deal:
1- Not Negotiating the car purchase price:
If all you’re negotiating is the monthly payment rather than the purchase price, not only can you get roped into an auto loan that’s years longer than you should accept, but an unscrupulous car dealer can pack costly extras into the financing package.
Although your car loan’s monthly payment is important — and you should know how much you can afford each month — it should not be the basis of your price negotiation.
Instead, your focus should be on the price of the car and the total cost of financing over the life of the loan. Smart buyers insist on knowing the price of the car before they start discussing financing.
2- Not knowing your credit score and worthiness:
You can expect paying higher interest rates if you allow the dealer to determine your creditworthiness.
Your interest rate is determined by your creditworthiness, and a borrower who has a high credit score is eligible for a lower car loan rate than one who does not.
You will be in the driver’s seat during negotiations if you are aware of your credit score beforehand. With it, you’ll be able to predict the rate and determine whether the dealer is trying to overcharge you or lie about your eligibility.
3- Not Considering Your Entire Monthly Budget:
There’s nothing worse than not paying your car loan.
If you take out a car loan that is more than you can afford, you can expect to end up in financial trouble and going bankrupt if you miss deadlines or refuse to pay.
Remember, your car payment is probably not the only thing you have to pay each month.
You have utilities, food, insurance, and other expenses, in addition to rent or a mortgage.
So, you must consider your monthly income, or if you get into a car loan that you cannot afford, your best option is often to sell the car, pay off the loan, and find a less expensive car.
4- Financing extra costs and add-ons:
The cost of the car is the only thing you want to finance with a car loan. You don’t want to finance fees, expensive extras, or taxes.
All of those extras raise your loan-to-value ratio, potentially raising your interest rate.
Plus, you don’t want to pay interest on everything.
Dealerships benefit from add-on sales, particularly those of aftermarket goods sold by the finance and insurance department.
Pay for an add-on out of pocket if that is something you genuinely want. Even better, see if you can find it for less elsewhere besides the dealership.
In the case of aftermarket items, extended warranties, and gap insurance, purchasing from a third party is frequently less expensive.
5- Not considering alternative options and opportunities:
A bad financing deal can result from failing to shop around and consider other options. Dealers frequently mark up their rates by a few percentage points to ensure a profit.
Shop around and get a few quotes from other dealerships, banks, or credit unions before visiting the dealership. This will give you an idea of the available interest rates for your credit score and ensure you get the best deal.
Keep in mind that banks may have stricter requirements than credit unions, but they may offer better rates than the dealership.
If this is your first time purchasing a vehicle, look for first-time buyer financing programs at credit unions.
6- Not reading the fine print and agreements:
You probably just want to get on the road by the time you’re ready to sign the purchase and loan documents.
Unfortunately, rushing through paperwork and overlooking details can end up costing you in the long run.
The first thing you should do is double-check that the numbers on the paperwork correspond to the deal you agreed to. Pay close attention to the car’s price, the interest rate, and the length of the loan.
If there are blank spaces or errors on the documents, insist on having them filled out or corrected before signing. When you’ve already signed the papers, it’s difficult to argue about mistakes.
7- Choosing a loan that is too long:
Longer terms may provide appealing lower payments. However, the longer you take to repay your loan, the more interest you’ll have to pay. Some lenders will also charge you a higher interest rate if you choose an extended repayment period because there is a greater chance you will become upside-down on the loan.
Consider your priorities and budget when deciding which option is best for you. For example, if you enjoy getting behind the wheel of a new vehicle every few months, being locked into a long-term loan may not be the best option for you. However, if your budget is tight, a longer term may be the only way to afford your car.
Overall, Dealership financing is an easy and convenient way to get a car loan, but it also comes at an added cost. It’s critical to consider when and if it’s the right thing to do; you don’t want to take out a car loan when you don’t have to.
If you have ample savings that aren’t devoted to your retirement, your family’s emergency fund, or otherwise committed, you might want to consider paying cash for your next car.
Paying cash can save you money if your current return on your savings is significantly lower than the interest rate you can get on a car loan.
