5 car loan mistakes that cost you money

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If you want to save money on your next car purchase, you’ll need to do more than just get a “good” deal with the seller on the sticker price. A mistake on your auto credit could cost you money and wipe out the savings negotiated on the purchase price. Keep these tips in mind to make sure you walk away with the best deal possible.

What is a good interest rate for a car loan?

The interest rate on your car loan depends on various factors, such as the type of vehicle, your credit history, and the length of your expected car loan. All lenders use these factors differently, so the best way to find a good auto loan rate is to shop around for a few different lenders.

You should also take the time to improve your score before you begin your loan search. A “good” interest rate on a car loan is lower than your average credit score. According to Experiential, these averages amount to:

Credit score Average interest rate (new) Average interest rate (used)
781–850 2.34% 3.66%
661–780 3.48% 5.49%
601–660 6.61% 10.49%
501–600 11.03% 17.11%
300–500 14.59% 20.58%

5 auto credit mistakes that can cost you dearly

Consider these common mistakes drivers make when taking out a car loan.

1. Negotiate the monthly payment rather than the purchase price

While the monthly price of your car is important – and you need to know in advance how many cars you can afford each month – don’t show your whole hand to the seller. If you do, you will lose your ability to negotiate a lower purchase price.

Once voluntary, a monthly auto loan amount tells the dealership how much you’re willing to spend, and they may try to hide other costs, such as a higher interest rate and surcharges. They may also offer you a longer repayment term, which will keep that monthly payment within your budget but cost you more overall. To avoid this, negotiate the price of each cost category separately.

Key to take away

Never buy a car solely on the basis of the monthly payment; the dealer could use this number to suspend negotiations or sell to you.

2. Let the dealer define your creditworthiness

Your creditworthiness determines your interest rate; a borrower with a high credit score qualifies for a better auto loan rate than a borrower with a low score. Reducing only one percentage point in interest on a $ 15,000 auto loan over 60 months would save hundreds of dollars in interest paid over the life of the loan.

Understanding your credit score in advance will put you in the driver’s seat in terms of negotiation. It is also wise to get a few quotes from banks or credit unions before visiting the dealership. This will give you an idea of ​​the interest rates available for your credit score and ensure you get the best deal.

Key to take away

Shop around to many different lenders to get a feel for your estimated interest rates and take whatever steps are necessary to improve your credit score before you head to the dealership.

3. Not choosing the right term of office

The repayment of a car loan can go from 24 to 84 months. It is easy to be attracted to a longer term loan because usually the monthly payment is lower. But the longer your repayment, the more interest you will pay. There are pros and cons to a short and long term loan option.

In order to decide which option is best for you, consider your priorities. For example, if you’re the type of driver who wants to get behind the wheel of a new vehicle every few months, being trapped in a long-term loan might not be right for you. On the other hand, if you are on a budget, a longer term might be the only way you can afford to pay for your car. Use an auto finance calculator to understand what your monthly payment will be to decide which option is best for you.

Key to take away

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

4. Financing of the cost of add-ons

Add-ons make up a large portion of the profits generated from new and used car sales, especially when generated in the finance and insurance office through aftermarket add-ons. Even if you want extended warranty or credit life insurance, these items are available cheaply from sources outside of the dealership.

Incorporating these add-ons into your financing will also cost you more in the long run as you will be charged interest on these add-ons, so question any fees you don’t understand.

Key to take away

In the long term, the top-ups will result in an overall increase in interest paid. Prepare for negotiations by knowing which add-ons you really need and which you can find cheaper elsewhere.

5. Advance negative equity

Being “upside down” on a car loan is when you owe more on your car than it is worth, resulting in negative equity. When a dealership tells an upside down consumer that they can fit that negative equity into financing a new car, it means that negative equity will be added to the purchase price of the new car. You will then pay interest on that negative equity for the life of the new loan. Plus, if you were upside down on your last trade, there’s a good chance you’ll be even more upside down next time.

Instead of transferring your negative equity into your new loan, try waiting to pay off your old loan before taking out the new one. You can also choose to prepay your negative equity to the dealer to avoid paying excess interest.

Key to take away

Don’t drive negative equity on your vehicle forward. Instead, pay off your old loan as much as possible or pay the difference when you trade in your vehicle.

The bottom line

The key to success when it comes to taking out auto credit is preparation. This means negotiating the monthly payment, knowing your credit score, choosing the right term, being aware of additional costs, and avoiding negative equity.

Starting a conversation with a potential lender with these mistakes in mind will save you time and money.

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