Buying your dream car can be an exciting experience but it doesn’t have to be a daunting task. So whether it is your first time of buying a car buyer or you are looking to replace your old vehicle, considering the following 8 car loan mistakes people make and how you can avoid making them.
Mistake No.1: Low Credit Score
Your credit report plays a significant role when applying for a car loan since it is used by the lender in determining the interest rate. It is also used to evaluate the creditworthiness of an auto loan applicant because it is provided by credit bureaus that monitor your credit history.
In this light, it is prudent to learn what range your credit score falls into first, before applying for the car loan as high credit score equals better interest rate and approval of your loan request. On the other hand, a low credit score tells your lender it’s risky to lend to you, so they charge you high-interest rate or a reject your loan request.
Mistake No.2: Focusing Only On The Monthly Payment
When you securing a car loan, it is essential that you make both your monthly payments and budget compatible. However, it is a huge mistake to negotiate with the car dealer only the monthly payment rather than the full amount of that dream car. If you do, your negotiating power is forfeited, thus, giving an unscrupulous salesperson an opportunity for price manipulations and potentially higher interest rates.
Nevertheless, a smart borrower insists on knowing the total cost of the vehicle before negotiating car finance over the length of the loan.
Mistake No.3: Long-Term Car Finance
While long term car finance sound appealing as it focuses on smaller monthly repayments, it could be another costly mistake. When you choose to take on a long-term car loan, you may see higher interest rates compared to a short-term loan that is five years or even less.
Those additional payments you could have saved during the extended period of the loan could amount to thousands of dollars in unnecessary interest charges.
Bear in mind that new cars depreciate quickly in the first few years of usage, so the longer the tenure of the auto loan, the higher the interest rate you’ll have to pay. What is more, by the time you end up paying the loan, the car’s value in the market will have depreciated to a great extent if you choose to swap or sell it.
Mistake No.4: Financing Add-Ons
Car dealers make extra profit for the dealership by selling add-ons such as anti-theft devices, interior protection window tinting, and extended warranty. While some of these items, they are available at a cheaper rate from other sources outside the dealership.
When they are added to the rest of your car loan, you’ll end up paying extra in interest amounting to hundreds of dollars over the life of the loan. So it shouldn’t come as a surprise if they try to pass some of their offers on you.
Mistake No.5: Not Making a Down Payment
From a long-term point of view, a down payment of a loan is very helpful as it reduces the cost of your car finance. Another advantage of making a large down payment is that it lowers your monthly payments and cuts down negative equity. However, the drawback of not making an upfront installment is that it won’t lower your interest rate especially if your credit score is low.
The ‘zero down payment‘ offers are marketing gimmicks used by an auto lender to make extra money for the dealership. A minimum down payment of $1,000 will make you enjoy a better price of your car and could spare you a great amount of cash over the period of the loan balance.
Mistake No.6: Beware Of Rolling Over Negative Equity
Negative equity, also referred to as “upside down” are the terms used to describe owing more on your vehicle than it is worth. Dealers and lenders may tell their customers to roll over that negative equity, or what they owe on their old car into the financing of the new one.
For example; you owe $25,000 on a car that’s worth only $20,000. In this scenario, you have negative equity of $5,000. So, if you decide to sell, not only would you have to give the lender the $20,000 you owe, you’d also have to come up with an additional $5,000.
This suggestion is a trap and should not be taken lightly, because it will make your monthly payments bigger and also increase the chances of finding yourself upside down. What is more, you’ll be stuck with the negative equity from the old car every time you want a new deal.
Mistake No.7: Not Comparing the Loan Options
When it comes to buying your dream car, it is prudent to shop for multiple lenders at several car dealerships. Car financing can be done via two major sources. The first is directly from local banks and the second one is through the financing arms of automakers.
Both offer different interest rates, loan lengths, and terms and conditions. While these two loan options have their advantages and disadvantages, it affords you the opportunity to investigate and choose the best loan offer. LoansGeeks can help you make car finance comparisons, and also secure loans.
Mistake No.8: Not Being Able To Walk Away
Once you at a dealership, and are negotiating with the salesperson, you are not obliged to stay if you do not like the deal or the direction the negotiations are headed. You can simply walk without being afraid or embarrassed. Walking away without feeling pressured is a powerful tool that can save you from making a big mistake that can cost you for the entire tenure of the car loan.
A salesperson might persuasively tell you that you are throwing away the opportunity to purchase a good car if you walk away as the vehicle could be gone tomorrow if you don’t buy it today. That’s true, that specific car could be sold the next day, yet, and there is no scarcity of good cars as manufacturers make thousands of them every day. So, one dealership does not have your choice car, check another one, or even go online and check out a few dealerships around town.