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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 aim is to assist you make better financial choices by offering interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare information at no cost and help you make sound 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 Make Money The products that appear on this website are provided by companies that pay us. This compensation may impact how and where products are displayed on this website, for example for instance, the sequence in which they appear within the listing categories, except where prohibited by law. Our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the entire universe of businesses or financial deals that may be available to you. My Ocean Production/Shutterstock

5 minutes read Read March 02, 2023

Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in navigating 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 late 2021. They are dedicated to helping readers gain the confidence to control their finances by providing clear, well-researched facts that break down complex topics into manageable bites. The Bankrate guarantee

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You have money questions. Bankrate can help. Our experts have helped you understand your finances for more than four decades. We continually strive to provide consumers with the expert guidance and the tools necessary to succeed throughout life’s financial journey. Bankrate follows a strict , which means you can be sure that our information is trustworthy and precise. Our award-winning editors and reporters produce honest and reliable information to assist you in making the best financial decisions. The content we create by our editorial team is objective, truthful, and not influenced by our advertisers. We’re honest about how we are in a position to provide quality content, competitive rates, and useful tools for you , by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the promotion of sponsored goods and services, or by you clicking on certain links posted on our website. So, this compensation can impact how, where and in what order items appear in listing categories in the event that they are not permitted by law for our mortgage or home equity products, as well as other products for home loans. Other factors, like our own website rules and whether the product is available in your region or within your personal credit score could also affect the way and place products are listed on this website. We strive to offer the most diverse selection of products, Bankrate does not include information about every credit or financial product or service. If you want to save money on your next car purchase, you’ll have to do more than just make a great deal with the salesperson on the . A mistake when taking out the money could end up costing you and wipe out the savings you bargained for on the purchase price. It’s true that it’s not that common, particularly among those with credit scores that are high. A report from the Financial Times revealed 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 rate they would normally pay for their credit scores. Don’t shop around to find the most affordable deal on auto financing is one mistake you want to avoid. There are other mistakes to avoid if you’re looking to land the most affordable deal. 1. Not shopping around is an easy and convenient way to secure a car loan however it comes at an added cost. Dealers often increase their rates by a couple of percent to ensure they make money. Before going to the dealer look around and visit credit unions or banks. Doing so will provide you with an understanding of the interest rates available for your credit score and make sure you get the best deal. Keep in mind that banks’ requirements may be more stringent that credit unions’, but they may offer better rates than you’ll find at the dealership. If it’s your first time purchasing a vehicle, look for programs that offer financing for first-time buyers at credit unions. When you’ve been preapproved for a loan and you’re able to bargain with the dealer more efficiently. After all, if the dealership isn’t willing to beat the rate you already have, you don’t need to count on their financing to purchase the car you’ve always wanted. Key takeaway

The preapproval process will ensure that you receive the most competitive rate, and will give you the leverage to bargain.

2. Negotiating the monthly installment instead of the purchase price While the monthly payment on your vehicle loan is crucial — and you must know it ahead of time each month, it shouldn’t be the basis of your . When you’ve made it clear, a monthly car loan amount informs the dealer how much you’re willing to invest. The salesperson might also try to cover up other costs such as a higher interest rate and additional charges. They could also offer you on a longer payment timeframe, which can allow you to keep the monthly installment within your budget, but will cost you more overall. For this reason, negotiate the vehicle’s purchase price and each instead of focusing solely on the monthly payment. Key takeaway

Never purchase a car based on the monthly installment alone as the dealer might use that number to place negotiations on hold or upsell you.

3. Let the dealer determine your creditworthiness. Your creditworthiness is the basis for your interest rate one who has an excellent credit score is eligible for a better automobile loan rate than one who has a low credit score. Reducing just one percentage point interest from a $15,000 vehicle loan over 60 months could reduce the amount of interest paid throughout the duration of the loan. Being aware of your credit rating prior to time will place you in the driver’s seat when it comes to negotiations. With it, you will know the price you can expect — and if the dealer is trying overcharge you or misrepresent the loan you’re eligible for. What is a bad APR for an auto loan? New auto loans have an APR of 6.07 percentage in the 4th quarter 2022 according to data from . Credit scores of people with good credit qualify for rates as low as 3.84 percent, while those who had bad credit had an average new vehicle price that was 12.93 percent. Used car rates were higher than 10.26 percent across credit scores. And the was a sky-high 20.62 percent. Thus the « bad » APR for a car is on the higher portion of these figures. In law, loans aren’t allowed to have an annual percentage rate over 36 percent. Look for an lender who offers the average interest rate for your score, or higher. What’s the most important takeaway

Explore a variety of lenders to get an idea of the estimated interest rates. You can do whatever you can to improve your credit score prior to heading to the dealership.

4. Do not choose the correct term length can be a challenge. The range of durations is from 24-84 month. Longer terms may offer tempting, lower costs. But the , the more the interest you’ll have to pay. Certain lenders will also charge higher interest rates in the event you select an extended repayment period since there’s a greater chance you’ll become upside-down on the loan. To determine which is the best choice for you, consider your top priorities. For instance, if you’re a person who wants to get behind the wheel of the latest car every few months, being trapped in an extended loan might not be right for you. However, if you have an extremely tight budget then a longer-term contract might be the only way you can afford 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 overall in interest, but will have high monthly payments; a long-term loan will offer smaller monthly payments, however it will cost you more interest costs over the course of time.

5. Financing the costs of added-ons Dealerships make money from the sale of products that are sold by the finance or insurance department. If you’re in the market for the gap insurance items are available at a lower cost through sources other than the dealership. The addition of these items to your financing will also result in more expense in the end, since you’ll be charged interest on them. Be sure to inquire about every charge you don’t understand in order to avoid unnecessary costs to the purchase price. If there’s an extra you really want then pay for it out of your pocket. Better yet, check whether it’s sold outside of the dealership at a lower cost. Buying from a third party is usually cheaper than aftermarket items including extended warranties . Most important takeaway

In the long run adding financing options will result in more interest being paid over the long run. Come prepared to negotiations knowing what add-ons are essential and which are cheaper elsewhere.

6. Rolling negative equity forward Being  »  » on an auto loan is when you have more debt on your car than the value of it. Some lenders will allow you to roll over that negative equity into a new loan but this is not a prudent decision for your financial situation. If you do, you’ll be charged interest on your previous and current vehicle. And if you were upside-down when you traded in your last car most likely you’ll be again. Instead of incorporating negative equity into the new loan, try before taking out the new one. It is also possible to pay off the negative equity in advance to the dealer in order to keep from having to pay excessive interest. Key takeaway

Don’t roll negative equity from your vehicle forward. Instead, you should pay off as much of your old loan as possible or pay the difference when you trade in your vehicle.

The most important aspect to success when taking out a car loan is preparing. It is about negotiating your monthly payment and being aware of your credit scores, deciding on the right term length, being aware of add-on costs and avoiding carrying over negative equity. Be aware of any mistakes that could occur when you negotiate. If you do, with the right luck, you’ll leave with a savings and time. Find out more

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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the ways and pitfalls of borrowing money to purchase an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances by providing concise, well-researched and well-researched content that break down complex topics into digestible chunks.

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