- You should know your credit history and plan your budget before taking out an auto loan.
- The longer the term length, the more likely you will owe more on your car than it is worth.
- Researching terms from different lenders can help you get the best deal possible.
- Learn more about Personal Finance Insider loan coverage here.
Buying a car, new or used, is a big decision – and you might be tempted to rush it without considering the potential pitfalls that come with the purchase. Here are seven mistakes to avoid when shopping for an auto loan.
1. Not knowing your credit history
Not knowing your credit score before applying for a loan is like flying blind in a storm. Knowing your creditworthiness will give you a general idea of the loan terms you qualify for and what to expect in loan negotiations. If your rating is low and you are in no rush to buy, you may decide to take the time to improve your rating to get a better interest rate.
To get your credit report from any of the three major credit bureaus, use annualcreditreport.com. You can get your report for free once a week until April 20, 2022. You won’t get your credit score on this report, but you will get information about your credit and payment history. When reviewing your credit report, you can spot errors and determine where you can improve.
You can get your score for free on your credit card statement or online account. You can also buy it from a credit reporting agency.
2. Not calculating your budget
Before taking out a loan, you need to review your financial situation and make sure you can afford to repay the debt. If you don’t plan how you’ll fit monthly loan payments into your budget, you could end up falling behind on payments. This could cause you to rack up thousands of dollars in unpaid interest and significantly hurt your credit score, which could impact your ability to get other loans in the future.
3. A car loan turned upside down
The value of your car usually decreases over time, so it’s possible to reverse your loan, which means you owe more on your loan than your car is worth. This isn’t inherently a bad thing, but it does cause a problem depending on your situation.
For example, if you want to get rid of your car before paying it off, you will not only have to sell or trade it in, you will also have to pay the lender the difference between the value of the car and the value of the loan. amount. Or if you have an accident that totals your car while you’re upside down on your loan, your insurance will only cover the value of the car. You will have to pay the difference out of pocket.
You can combat this problem by making a larger down payment or choosing a shorter term to pay off your loan faster.
4. Choose a loan term that is too long
While it may be tempting to get lower monthly payments on your car, the longer your loan term, the more interest you’ll pay. Longer terms usually come with a higher interest rate that you will have to pay for longer. Also, the longer the term, the more likely it is that the value of your car will decrease to the point where you will reverse your loan.
Generally, 60 months is considered the maximum tenure you should consider. To avoid choosing a long term, try to choose a shorter term with higher monthly payments, as long as you can fit it into your budget.
If you just take the first loan offered to you, you might leave a better deal on the table elsewhere. It’s important to see what terms are offered to you by a variety of lenders, as some may have lower interest rates or different options for length of terms.
6. Not being pre-approved for a loan
If you only go to your car dealership for a loan, you may miss out on better options elsewhere.
You can often get the best deal on a loan by getting pre-approved for a loan from various banks, credit unions, and online lenders. You should do this before you start shopping for a car because you’ll have a better idea of how much you’ll be approved for and what rates are available to you. Often this process will only require an indirect credit inquiry and will not affect your credit score.
7. Expensive and Unnecessary Warranty Options
If you are looking to buy a used car, the original warranty may have expired and dealers will try to entice you to add a new warranty to your purchase. The warranty may cover the cost of routine repairs and maintenance, but only covers a small list of issues that you are unlikely to encounter. These guarantees are often increased by hundreds or thousands of dollars and will add to the overall cost of your loan.
That said, you may still want a guarantee for the stress relief it provides. In this case, do the math and determine the cost of repairs and maintenance without warranty, then use that information to negotiate the price with the lender.
Avoiding mistakes when taking out an auto loan can be summed up simply: Don’t rush the process and pay attention to any terms and conditions that come with your loan before you sign on the dotted line.