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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 smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. This allows users to conduct research and analyze information at no cost – so you can make financial choices without a doubt. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that are advertised on this website come from companies who pay us. This compensation may impact how and when products are featured on this website, for example for instance, the order in which they may appear in the listing categories and other categories, unless prohibited by law. Our mortgage or home equity products, as well as other home lending products. However, this compensation will have no impact on the content we publish or the reviews that you read on this site. We do not include the vast array of companies or financial offerings that could be accessible to you. My Ocean Production/Shutterstock

5 min read Published March 02, 2023.

Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the details of taking out loans to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers feel confident to take control of their finances by providing concise, well-researched and well-researched content that breaks down complex issues into digestible chunks. The Bankrate promise

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We make sure that everything we publish ensures that everything we publish is accurate, objective and reliable. The loans reporters and editors are focused on the areas that consumers are concerned about most — the various types of loans available as well as the most favorable rates, the most reliable lenders, ways to pay off debt and much more. So you’ll feel safe making a decision about your investment. Integrity of the editing

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If you have questions about money. Bankrate has the answers. Our experts have been helping you manage your finances for more than four decades. We strive to continuously give consumers the professional advice and tools needed to make it through life’s financial journey. Bankrate follows a strict standard of conduct, which means that you can be sure that our content is honest and reliable. Our award-winning editors, reporters and editors create honest and accurate information to assist you in making the best financial choices. The content created by our editorial team is objective, factual and uninfluenced from our advertising. We’re open regarding how we’re able to bring quality content, competitive rates, and helpful tools to you , by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or through you clicking specific links on our site. This compensation could influence the manner, place and in what order the products are listed within categories, unless it is prohibited by law for our mortgage or home equity, and other home loan products. Other elements, such as our own rules for our website and whether the product is available within the area you reside in or is within your self-selected credit score range can also impact the way and place products are listed on this site. Although we try to offer a wide range offers, Bankrate does not include specific information on every credit or financial products or services. If you’re looking to save money for your next purchase of a car, you’ll have to do more than just make a great bargain with the salesperson about the . Making a mistake when purchasing the money could end up costing you and erase any savings that you have negotiated on the purchase price. Unfortunately, it’s not all the time, especially for borrowers with high credit scores. An investigation from revealed the fact that 3 percent of super-prime and prime consumers received auto loans that had an APR of at least 10 percent, which is nearly double the average rate for those with credit scores. Doing not shop around for the best deal in auto loan financing one mistake you want to avoid. There are other mistakes to avoid if you want to secure the best deal possible. 1. Not shopping around is an easy and efficient method to secure an auto loan, but it also comes at an added cost. Dealers typically mark their rates up by a few percentage points to make sure they earn. Before going to the dealer, shop around and from banks or credit unions. Doing this will give you an idea of the rates that are available for your credit score and ensure that you receive the best deal. Be aware that banks’ requirements might be more stringent than credit unions’ but they may offer better rates than you’ll find at the dealership. If it’s your first experience purchasing a vehicle, look for programs that offer financing that are designed for buyers who are first-time buyers. These can be found at credit unions. When you’ve been preapproved for the loan and you’re able to deal with the dealership more effectively. If the dealer doesn’t beat the rate you currently have, you don’t need to depend on their financing to purchase the car you’ve always wanted. Key takeaway

The preapproval process will ensure that you get the best price and give you leverage to negotiate.

2. Negotiating the monthly installment rather than the purchase price While the monthly payment on your car loan is important — and you must have it in advance every month — it shouldn’t be the basis of your . Once volunteered, a monthly car loan amount tells the dealer what you’re willing to invest. The salesperson could also try to conceal other costs, like a higher interest rate and other fees. They might also pitch you with a longer repayment timeline, which will keep that monthly payment within your budget, but could increase the overall cost. To avoid this, negotiate the price of your vehicle’s purchase and the price of each, instead of focusing on your monthly installment. The most important thing to remember is

Never purchase a car based only on the monthly payments and the dealer may utilize that information to stop negotiations at a standstill or even upsell you.

3. The dealer should be able to define your creditworthiness. Your creditworthiness is the basis for the rate of interest you pay and a person who has a high qualifies to receive a better car loan rate than someone with a lower score. Reducing only one percentage point of interest on a $15,000 vehicle loan over 60 months can reduce the amount of interest over the life that the loan. Being aware of your credit rating ahead of time will put you in the driver’s seat in negotiations. With it, you will know what rate you can be expecting — and also if your dealer is trying overcharge you or lie about the amount you’re eligible for. What is the worst APR for an auto loan? New auto loans have an APR of 6.07 percentage in the 4th quarter 2022, according to figures from . The credit score of those with excellent credit was eligible for rates of around 3.84 percent, while people having bad credit had an average new automobile cost of 12.93 percent. Used car rates were higher — 10.26 percent for all credit scores. And the was a sky-high 20.62 percent. Thus it’s a « bad » Annual percentage ratio for car would be at the higher range of these figures. The law states that loans cannot have an interest rate of more than 36 percent. Seek a lender that will offer you the average interest rate on your score or better. What’s the most important takeaway

Shop around with many different lenders to find out the approximate interest rates you can expect to pay and take any steps to boost your credit score prior to going to the dealership.

4. Not choosing the right term length ranges from 24 to 84 months. Longer terms may offer tempting low costs. However, the longer the term , the more cost of interest you’ll be paying. Some lenders also charge higher interest rates in the event you select an extended repayment timeframe because there’s a greater risk you’ll end up upside-down on the loan. To determine which is the best option for you, consider your priorities. For instance, if you are the type of driver who is looking to get driving an updated vehicle every couple of months, being trapped in an extended loan is probably not the right choice for you. On the other hand, if you have a limited budget then a longer-term contract might be the only way to afford your vehicle. Use a to understand your monthly payment and decide which option is best for you. What you should take away from this

A short-term loan will cost less overall in interest, however it will come with high monthly payments; a long-term loan will have lower monthly payments , but will have higher cost of interest over time.

5. Finance the cost of additional items Dealerships earn from — particularly aftermarket products sold through Finance and Insurance department. If you’re looking for an insurance policy or the gap insurance products can be purchased for less through sources other than the dealership. The addition of these items to your financing could cost you more over the long term, since you’ll be charged interest on these items. Examine every cost you don’t understand to avoid unnecessary additions to the cost of your purchase. If you find an additional item that you’re really interested in, pay for it out-of-pocket. If you want to make sure, ask if it’s available outside the dealership at a lower cost. The purchase of a third party is often cheaper for products that are aftermarket such as extended warranties and . Most important takeaway

In the end the financing add-ons can result in more interest being paid in the end. Come prepared to negotiations knowing what add-ons are essential and what you can get cheaper elsewhere.

6. The process of rolling forward negative equity  »  » on a car loan is the case when you owe more money on your vehicle than it is worth. The lender may let you transfer that equity into a new loan but it’s not a smart financial move. If you do this, you’ll have to pay interest on your previous and current vehicle. If you were upside-down on your last trade-in most likely you’ll be in the same position again. Instead of rolling negative equity into your new loan first, consider making the move to take out the new loan. You could also repay your equity upfront with the dealer to keep from having to pay excessive interest. What’s the most important takeaway

Don’t put negative equity on your vehicle forward. Instead, pay off the full amount of your previous loan as possible or take the amount that is left when you sell your vehicle.

The main thing to success when applying for a car loan is preparedness. This means negotiating the monthly installment and understanding your credit rating, selecting the appropriate term length, being aware of add-on expenses and avoiding the risk of rolling into negative equity. Keep potential mistakes in mind as you negotiate. With luck, you will leave with a savings and time. Learn more


The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ins and outs of securely taking out loans to purchase a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are enthusiastic about helping readers get the confidence to take control of their finances by giving clear, well-studied facts that break down otherwise complicated topics into digestible pieces.

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