6 common car loan mistakes that cost you money Part Of Buying a Car In this series Buying a Car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide original and objective content. We also allow you to conduct your own research and compare information at no cost and help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site come from companies that compensate us. This compensation could affect how and where products are displayed on the site, such as for instance, the order in which they appear in the listing categories and other categories, unless prohibited by law. Our mortgage, home equity and other home loan products. However, this compensation will not influence the information we provide, or the reviews you see on this site. We do not contain the entire universe of businesses or financial offerings that could be open to you. My Ocean Production/Shutterstock
5 min read Published March 02, 2023.
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ins and outs of securely borrowing money to buy an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to take control of their finances through providing precise, well-researched and well-written information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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There are money-related questions. Bankrate can help. Our experts have been helping you master your finances for more than four decades. We are constantly striving to provide consumers with the expert guidance and the tools necessary to make it through life's financial journey. Bankrate follows a strict , therefore you can be confident that our content is honest and accurate. Our award-winning editors, reporters and editors produce honest and reliable content to help you make the best financial decisions. Our content produced by our editorial team is objective, factual and uninfluenced through our sponsors. We're honest about how we are able to bring quality information, competitive rates and useful tools to you by explaining how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for placement of sponsored products and, services, or when you click on certain links posted on our site. Therefore, this compensation may influence the manner, place and when products appear in listing categories in the event that they are not permitted by law. This is the case for our mortgage, home equity and other products for home loans. Other factors, like our own proprietary website rules and whether or not a product is available within your region or within your personal credit score could also affect the manner in which products appear on this site. Although we try to offer an array of offers, Bankrate does not include specific information on each credit or financial products or services. If you are looking to save money for your next car purchase, you'll need to do more than strike a good deal with the salesperson on the . An error when buying the money could end up costing you and wipe out the savings you bargained for in the price of purchase. It's true that it's not that uncommon, especially among borrowers with high credit scores. An investigation from revealed three percent of prime and super-prime consumers received auto loans that had an APR of 10 percent or more that is more than twice the average rate for those with credit scores. Not shopping around for the best deal in auto loan financing only one of the mistakes to avoid. There are other mistakes to be aware of if you wish to get the most affordable deal. 1. Not shopping around is an easy and efficient method to secure a car loan however, it costs extra. Dealers usually mark up their rates by a couple of percentage points to make sure they profit. Before visiting the dealership, shop around and from banks or credit unions. Doing so will give you an idea of the interest rates available for your credit score , and make sure you get the most competitive rate. Be aware that banks' requirements may be more stringent than credit unions' however, they might offer lower rates than those you find at the dealership. If it's your first experience purchasing a car, search for programs that offer financing for first-time buyers in credit unions. Once you are preapproved for the loan, you can negotiate with the dealership more effectively. After all, if the dealer isn't willing to beat the rate you currently are paying, you don't have to rely on their financing to purchase the car you've always wanted. Key takeaway
The preapproval process will ensure that you receive the best rate available and give you leverage to negotiate.
2. Negotiating the monthly payment rather than the purchase price. Although the monthly payment on your car loan is important -- and you must have it in advance each month -- it shouldn't form the foundation of your . Once volunteered, a month-long car loan amount informs the seller how much you're willing to invest. The salesperson may also attempt to cover up other costs for example, the higher interest rate and add-ons. They could also offer you on a longer payment timeframe, which can help keep your monthly payments within your budget but increase the overall cost. In order to avoid that, you should negotiate the vehicle's purchase price and then each time instead of focusing on your monthly payment. Key takeaway
Do not buy a car solely only on the monthly payments and the dealer may use that number to place negotiations on hold or upsell you.
3. Letting the dealer define your creditworthiness. Your creditworthiness is the basis for your interest rate, and a borrower with a high qualifies for the best vehicle loan rate than one who has a low credit score. Shaving just one percentage point interest from a $15,000 car loan over a period of 60 months could reduce the amount of interest throughout the duration that the loan. Understanding your score on credit ahead of time will put you in control in terms of negotiation. With it, you will know what rate you can be expecting -- and also if your dealer is trying to charge too much you or lie about the loan you're eligible for. What is a bad APR for a car loan? New auto loans had an of 6.07 percentage in the 4th quarter 2022, according to figures from . Credit scores of people with good credit qualify for rates of around 3.84 percent, whereas those who had bad credit had an average new car rate that was 12.93 percent. Used car rates were higher -- 10.26 percent across credit scores. The highest rate was 20.62 percent. Thus it's a "bad" annual percentage rate for a vehicle would be at the upper range of these numbers. Legally, loans can't have an APR that is greater than 36 percent. Seek an lender that will offer you an APR that is based on your credit scores, or higher. Key takeaway
Shop around with many different lenders to find out your estimated interest rates and take any steps to improve your credit score prior to going to the dealership.
4. Not choosing the right term length can mean a gap of 24-84 month. More lengthy terms can offer attractive and lower monthly cost of payments. However, the longer the term , the more the interest you'll have to pay. Certain lenders will also charge a higher interest rate in the event you select longer repayment terms because there's a greater risk you'll be upside-down with the loan. To determine the best option for you, think about your top priorities. If, for instance, you're the kind of driver who is looking to get driving 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're on an extremely tight budget and a long-term loan may be the only option you'll be able to pay for the car you want. Utilize a calculator to determine your monthly payment and decide which option is best for you. Key takeaway
A short-term loan will cost less interest in the long run but will have high monthly payments. A longer-term loan will come with lower monthly payments but higher interest costs over the course of time.
5. Financing the cost of additional items Dealerships earn from the sale of products sold via the Finance and Insurance department. If you want an or gaps insurance policy, those options are available for less from outside sources. The addition of these items to your financing could result in more expense over the long term, since you'll be charged interest on them. Examine every cost you aren't sure about in order to avoid unnecessary costs to the cost of your purchase. If you find an additional item that you're really interested in, pay for it out-of-pocket. Better yet, check whether it's sold outside of the dealership for less. The purchase of a third party is usually cheaper than aftermarket products including extended warranties . Key takeaway
In the long term adding financing options will increase the amount of interest you pay in the end. Come prepared to negotiations knowing what add-ons are essential and which you can find cheaper elsewhere.
6. Moving negative equity forward " " on an auto loan is when you owe more on your vehicle than the value of it. Some lenders will allow you to carry that negative equity into a new loan however it's not a smart choice for financial reasons. If you do, you'll be charged interest on the current and prior car. And if you were upside down when you traded in your last car, chances are you will be again. Instead of rolling your negative equity into the new loan first, consider taking out the new loan. You can also pay off your negative equity upfront with the dealer to save yourself from paying excessive interest. The most important thing to remember
Don't roll negative equity from your vehicle forward. Instead, make sure you pay off as much of the old loan as you can, or pay the difference when you trade in your vehicle.
The most important aspect to success when you take out an auto loan is being prepared. This means negotiating the monthly payment and being aware of your credit scores, selecting the appropriate term length, making sure you are aware of additional charges and not carrying across negative equity. Keep potential mistakes in mind as you negotiate, and with luck, you will be able to save money and time. Learn more
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The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the ins and outs of securely taking out loans to purchase cars. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances with precise, well-studied information that breaks down complicated topics into manageable bites.
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