If you are in the process of buying a new car and are planning to finance it through a car loan, then this article is for you. However, some common mistakes can end up costing you more money in the long run. We will be looking at nine common car loan mistakes everybody makes and how to avoid them to ensure you get the best deal possible.
Statistics show that a significant majority of car buyers, around 85%, finance their vehicle purchases through a loan, with the average loan term being around 5 years. Also, when you use more than 30% of the credit limit you have, it can decrease your credit score.
With such a high rate of total car loan debt, it becomes clear why you need to be informed and have all the facts ready before signing up for this type of loan.
Common Car Loan Mistakes
- Ignoring Credit Score
- Skipping the Pre-Approval Process
- Focusing on Monthly Payments
- Neglecting Down Payment
- Not researching Loan Options
- Avoiding Add-ons and Extras
- Ignoring Loan details
- Not Considering Refinancing Options
- Failure To Compare Loan Rates
1. Ignoring Credit Score
One of the biggest car loan mistakes people make when getting a car loan is neglecting their credit score. Your credit score is a key factor in determining the interest rate you’ll get on the loan. If your credit score is low, you’ll likely face higher interest rates, meaning you’ll pay more over the life of the loan.
Without a credit score, you never know what rates you qualify for. If you agree to a higher rate than you really deserve, it will increase your future loan costs.
Besides that, your credit score simply determines your odds of getting a loan or receiving acceptable interest rates. If the lender perceives you as high-risk, then you might get a higher interest rate or be asked for a bigger down payment.
If you want to avoid this, check your credit report before applying for a car loan. You can request your credit report for free from the three major bureaus—Equifax, Experian, and TransUnion—by logging on to www.AnnualCreditReport.com.
2. Skipping the Pre-Approval Process
A lot of people often fall into the trap of going car shopping without having already been pre-approved for a car loan.
Though you have yet to receive prior approval, you go into the process unaware of the loan amount you are eligible for, including the interest rates. This often results in decisions made hastily, and you can end up paying more as well.
If you don’t pre-approve for a loan beforehand, you may mistakenly find yourself prey to the persuasive techniques used by the car dealer. Without good knowledge of your financing options, you may end up signing terms that are not favorable to you.
To prevent this from happening, it is wise to get pre-approval before going car shopping. This will help you determine the exact amount of money and the methods of funding.
3. Focusing on Monthly Payments
Although a lower monthly payment might attract you in the beginning, it is important for you to review the overall cost of the loan, including interest and fees. By selecting a longer loan term to get lower monthly payments, it could mean more interest being paid altogether.
To avoid this mistake, always compare loan offers based on the annual percentage rate (APR) and the total cost of the loan. This help you decide on the best option, taking into account both the monthly payment and the overall cost of the loan.
4. Neglecting Down Payment
When getting a car loan, failing to make a bigger down payment can be a major mistake that can cost you more money in the long run.
Not putting down at least 20% of the car’s purchase price can lead to higher interest rates and longer loan terms. It implies that you will be paying more interest during the lifetime of the loan and will have higher monthly payments.
If you don’t want to fall into this common car loan mistake, then it’s better to save up a considerable amount of money in the beginning to get better loan terms.
5. Not researching Loan Options
Most applicants fail to investigate the terms of the loans before initiating the application. Without comparing interest rates, terms, and fees among different financing providers, you can overpay what you are supposed to.
Here is a way to overcome this challenge. To achieve this, search for all loan resources, including traditional banks, credit unions, and online lenders. Paying regard to interest rates, loan terms, fees, and any distinctive features lenders offer is yet another consideration to watch out for.
6. Avoiding Add-ons and Extras
The dealers sometimes attempt to promote extended warranties, gap insurance, and a remedy plan for car care as a necessity, but extra features may make the repayment of a car loan unreasonably expensive.
That is why, before buying, consider which of the options are really required. In order to avoid getting involved in products or services that are not required, it is very important to focus on getting the lowest price for the vehicle itself.
Car buying is a process that requires lots of outlays in various areas. Therefore, you should stay well-informed and confident in your decisions.
7. Ignoring Loan details
Study your details in the loan contract carefully to avoid surprises, like the fact that you haven’t paid any special fees or penalties before. Give due thought to the interest rate by calculating the repayment plan and any early payoff charges associated with it.
Be careful about getting so excited about a new car that you enter into a contract without clearly knowing its terms. Read the agreement carefully, and start to sign it only when you have a clear understanding of it.
Make sure that you read and understand every sentence of the terms and conditions, and feel free to ask any questions if you get something wrong.
8. Not Considering Refinancing Options
What many car owners do not know is that they can cut the cost of their car loan by refinancing an existing car loan. You may consider refinancing, which would bring your monthly payments down and save you some money if you took out the loan when interest rates were high or if your credit score has since improved.
Being aware of the current interest rates and your credit score will give you grounds to decide if refinancing is a good option after all.
Compare loan offers from several lenders to identify the ones with the best terms, and do not hesitate to negotiate with the lender if you think you can get better conditions. Through this method, you can be sure that you get the best offer when it comes to refinancing.
9. Failure To Compare Loan Rates
Lastly, one of the car loan mistakes several people make is not checking rates from other lenders. People often do not bother to compare car loan interest rates, and in the long run, this means that they could be spending an extra thousand dollars or more.
If you do not shop around and compare the rates offered by various lenders, your interest rate may be higher than it needs to be.
That raises the monthly payments, which are going to turn out to be higher, and the loan price in the long term will be accordingly more expensive.
Imagine taking a car loan with a 5% interest rate. Then, you get the other lender, who is offering the same loan but at 3%. Although the 2% difference can be considered small, it amounts to $1,500 in interest payments during the 5-year loan term on a $20,000 car.
When getting a car loan, one of the things you should do is compare different loan options and interest rates from various lenders.
Use websites for the comparison of the terms and offers. Also, don’t hesitate to bargain to get the best deal. Spending the time to find the best bargains can pay off in the end.
Conclusion
Getting a car loan is an important financial decision that can greatly impact your budget. To avoid overpaying, shop around and compare interest rates from different lenders.
Take your time to research and compare offers, by so doing, you can save money in the long run and secure the best possible terms for your car loan. I hope this article on common car loan mistakes was helpful. Kindly follow us on our social media pages.
