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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 financial calculators and tools that provide original and accurate content. This allows you to conduct research and compare data without cost, so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that are advertised on this site are from companies that compensate us. This compensation may impact how and when products are featured on this website, for example the order in which they be listed within the categories of listing, except where prohibited by law for 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 see on this site. We do not include the vast array of companies or financial offers that may be available to you. My Ocean Production/Shutterstock

5 minutes read. Published March 02, 2023.

Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the ways and pitfalls of borrowing money to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers to control their finances by providing clear, well-researched information that breaks down complicated subjects into bite-sized pieces. The Bankrate promises

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At Bankrate we strive to help you make better financial decisions. While we adhere to strict ethical standards ,

This article may include references to products from our partners. Here’s an explanation for how we earn money . The Bankrate promise

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They ensure that what we write is objective, accurate and reliable. The loans journalists and editors focus on the points consumers care about most — the various kinds of lending options as well as the most favorable rates, the best lenders, ways to repay debt, and many more — so you’ll be able to feel secure when making a decision about your investment. Integrity of the editing

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There are money-related questions. Bankrate has the answers. Our experts have been helping you master your money for over four years. We strive to continuously provide consumers with the expert advice and tools required to succeed throughout life’s financial journey. Bankrate adheres to strict standards policy, which means you can be confident that our information is trustworthy and reliable. Our award-winning editors and reporters provide honest and trustworthy information to assist you in making the best financial decisions. Our content produced by our editorial team is objective, factual and is not influenced by our advertisers. We’re transparent regarding how we’re able to bring quality content, 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 the placement of sponsored products and services or by you clicking on certain links posted on our site. This compensation could impact how, where and in what order products appear within listing categories, with the exception of those it is prohibited by law for our mortgage, home equity and other products for home loans. Other factors, like our own website rules and whether or not a product is available in the area you reside in or is within your self-selected credit score range may also influence how and where products appear on this website. While we strive to provide the most diverse selection of products, Bankrate does not include details about every credit or financial products or services. If you want to save money on your next car purchase, you will need to do more than just make a great bargain with the salesperson about the . An error when buying an auto loan could result in a loss of money and erase the savings negotiated on the purchase price. Unfortunately, it’s not all that uncommon, especially among people with good credit scores. A study by the Federal Reserve showed the fact that 3 percent of super-prime and prime consumers were granted auto loans with an APR of 10 percent or more, which is more than double the rate they would normally pay for the credit score of their borrowers. Don’t shop for the lowest price in auto loan financing only one mistake you want to avoid. Here are some others to be aware of if you wish to secure the best price possible. 1. Not shopping around is an easy and efficient method to get a car loan, but it also comes at an added cost. Dealers usually mark up their rates by a couple of percent to ensure they earn. Before visiting the dealership, shop around and from the banks and credit unions. This will provide you with an understanding of the interest rates available to your credit score and make sure you are getting the most competitive rate. Be aware that banks’ criteria may be stricter that credit unions’ however they can offer lower rates than those you find at the dealership. If it’s your first time purchasing a vehicle, look at financing options for first-time buyers at credit unions. Once you are preapproved for an loan then you can negotiate with the dealership more efficiently. If the dealer isn’t willing to match the rate you already are paying, you don’t have to depend on their financing in order to obtain the car you’ve always wanted. The most important thing to remember is

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

2. The monthly payment should be negotiated rather than the purchase price While the monthly installment on your car loan is vital — and you should know in advance every month, it shouldn’t be the sole basis of your . Once volunteered, a each month’s car loan amount tells the seller how much you’re willing to pay. The salesperson may also attempt to hide other costs, for example, an increased interest rate or add-ons. They could also offer you on a more lengthy time frame for repayment, which could keep that monthly payment within your budget, but will cost you more overall. For this reason, negotiate the purchase price of the car and each instead of focusing on your monthly installment. Important takeaway

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

3. The dealer should be able to define your creditworthiness Your creditworthiness determines the rate of interest you pay and a person who has an excellent credit score is eligible for a better automobile loan rate than someone with a low score. By reducing one percent of interest from a $15,000 vehicle loan over 60 months could be a huge savings in the interest over the course of the loan. Understanding your score on credit ahead of time will put you in the driver’s seat in terms of negotiation. With it, you will know what rate you can anticipate — and whether the dealer is trying to overcharge you or lie about the amount you are eligible for. What is an unacceptable APR for a car loan? New auto loans have an APR of 6.07 per cent in 2022’s fourth quarter according to data from . The credit score of those with excellent credit was eligible for rates as low as 3.84 percent, while people who had bad credit had an average new automobile rate of 12.93 percent. The rates for used cars were higher — 10.26 percent across all credit scores. It was also a record-breaking 20.62 percent. Thus it’s a « bad » annual percentage rate for a car is on the higher portion of these numbers. The law states that loans can’t have an APR over 36 percent. Seek a lender who offers an average rate for your credit score, or better. Key takeaway

Shop around with many different lenders to find out the estimated interest rates. You can make any necessary steps to improve your credit score before heading to the dealer.

4. The wrong term to choose length can be a challenge. The range of durations is from 24 to 84 months. More lengthy terms can offer attractive, lower cost of payments. But the longer, the higher cost of interest you’ll be paying. Certain lenders will also offer a higher rate of interest if you opt for an extended repayment period since there’s a higher risk that you’ll be upside-down with the loan. To determine which is the best option for you, take a look at your needs and priorities. For example, if you’re a driver interested in getting behind the wheel of a new vehicle every few months, being stuck in an extended loan might not be right for you. However in the event that you’re on the funds to pay for your car, a longer term might be the only way you’ll be able to pay for your vehicle. Use a to understand your monthly payment and decide which one is the most suitable for you. The most important thing to remember

A short-term loan will cost you 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 time.

5. Financing the costs of additional items Dealerships earn from — especially aftermarket products offered through the finance and insurance office. If you want an or the gap insurance products are available at a lower cost from outside sources. Wrapping these add-ons into your financing will also increase the cost in the long run as you’ll be charged interest on these items. Be sure to inquire about every charge that you don’t know about to prevent unnecessary charges to the cost of your purchase. If there’s an extra you really want then pay for it out of your pocket. It is better to check if it’s available outside the dealership for less. A third-party purchase is often cheaper for products that are aftermarket including extended warranties . Most important takeaway

In the long term the financing add-ons can lead to more interest paid over the long run. Come prepared to negotiations knowing what add-ons are essential and which are cheaper elsewhere.

6. Moving negative equity forward  »  » on an auto loan is the situation where you have more debt on your car than what it’s worth. Some lenders will allow you to carry that negative equity into the new loan however this is not a prudent financial move. If you do, you’ll have to pay interest on the current and prior vehicle. If you were in the red on your last trade-in, chances are you will be again. Instead of rolling your negative equity into the new loan, try before taking out the new one. You can also pay off the negative equity upfront with the dealer to avoid paying excess interest. Key takeaway

Don’t put negative equity in your car forward. Instead, make sure you pay off as much of your old loan as possible or make the payment when you trade in your vehicle.

The most important aspect to success when you take out a car loan is preparedness. This means negotiating the monthly installment and being aware of your credit scores, selecting the appropriate duration, making sure you are aware of additional costs and avoiding the risk of rolling into negative equity. Be aware of any mistakes that could occur when you negotiate. If you do, with luck, you’ll be able to save money and time. Learn more


Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the details of taking out loans to purchase a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping their readers get the confidence to take charge of their finances by giving clear, well-studied information that breaks down complicated subjects into bite-sized pieces.

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