Steer past these potholes to reach the best deal on your financing
Newcomers to auto financing, and even those who have financed before, can easily become smarter shoppers by learning from the mistakes of others. Here are five common car loan errors to avoid when buying a vehicle.
1. Not budgeting
Spending thousands of dollars may not be something you can afford to do on impulse, so work out how much you can spend before getting dazzled by a shiny new vehicle. Consider what you might have as a down payment and trade-in allowance; budget what you can allocate as a monthly payment, and use auto finance calculators to estimate what you can spend on a car in total and how the loan payments pan out. Remember there will be sales tax, title and other fees on top on a vehicle’s sticker price.
2. Not checking your credit
Auto lenders will be interested in your credit score, and you should be too. Checking your score to see how good or bad your credit rating is will give you a clearer picture of what kind of interest rate you can expect. Many credit card accounts provide customers with their scores for free, and there are numerous paid-for options. Also, check your credit history reports for errors and correct them if necessary. If your credit score is poor, consider building credit before applying for a loan, or apply with a lender that works with consumers with bad credit.*
3. Leaving it late to get a loan
Turning up at the dealership ready to buy your perfect car and expecting the perfect financing to fall into place is leaving a lot to chance. Get preapproved for a loan before you go to give yourself more control and less to think about. Recommended by the Consumer Financial Protection Bureau, the preapproved route enables you look for the best auto loan with no pressure, then shop for your car with confidence once at the dealership. If the dealer offers you financing, you can compare it to your preapproval.
4. Concentrating on the monthly payment
Don’t focus on the monthly auto payment at the expense of recognizing the total cost of your purchase. While a comfortable monthly payment is important, think about the overall loan amount and what you’ll potentially pay in interest over the course of the contract. Besides APR, your final finance charge has a lot to do with the length of the loan.
5. Getting too long a loan
Normally, the longer the loan, the more you’ll pay as interest payments stretch out over time. Lengthy auto loans also pose other risks, such as the borrower becoming upside down; a situation where the rate at which the loan is paid back is slower than the depreciation in the vehicle’s value, so they owe more than the vehicle is worth. If the borrower also feels like changing their car before the end of a seven- or eight-year loan, for example, there’s the temptation to roll the outstanding balance into a new loan, which could compound the problem.
Buy and drive with assurance
Buying a car is one of the most thrilling purchases you can make, and it’s also one of the largest, which makes getting the financing right especially important. Avoiding these common car loan mistakes will help you enjoy the vehicle without running into problems when paying it back.
Learn more about auto loans with online lender RoadLoans.
* “Bad” or “poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press), Bankrate.com, Credit.com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by RoadLoans.com and Santander Consumer USA.