Buying a car can be fun and exciting. However, getting a car loan can be anything but. After all, the auto loan process can be confusing and intimidating, causing buyers to make mistakes that result in a bad car loan. If you’ve got bad credit,* dealers or insurance agents may take advantage, and you could be stuck with a car loan that will end up costing you tons in the long term.
So if you’re in the market for a new or used car, don’t get swindled into having to pay more than you really need to. Here’s a look at some smart and simple ways to steer clear of a bad auto loan, incorporating advice from the Consumer Financial Protection Bureau and Federal Trade Commission.†
Know Your Credit Rating
So much of what determines a good or bad auto loan is dependent upon your current credit rating. Before even considering a car loan you need to know what your credit rating is. If your credit rating is on the low side—below 620 for most lenders—you may have difficulty qualifying for a loan. If you do get a loan with a low credit score you can expect to pay a higher interest rate than you would if your credit was in the 700’s.
The Consumer Financial Protection Bureau recommends getting a credit report at least yearly and checking for errors that might prevent you getting credit or the best terms available to you. Making sure your credit report is accurate, and then doing your best to keep your credit in good shape may help you avoid a bad car loan.
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Use a Finance Calculator
Before you set foot on a dealer lot, you need to know what price range you can honestly afford. This is where an online car loan calculator comes in handy, as it will help you to determine a realistic monthly payment and show you how that payment will be affected by changes in loan terms and interest rates. Today there are a number of online car loan calculators that are also available as apps for both Apple and Android smartphones. Many buyers use these handy tools to calculate monthly payments, get pre-approved by a reputable online lender, and then find the nearest dealer with the best selection of cars in their price range. Armed with information from a finance calculator, you can begin your search for vehicles with payments that won’t end up breaking your budget.
Negotiate the Purchase Price
Of all the variables in an auto loan that can affect your monthly payment, the purchase price of the automobile is the biggest. While you may be willing to pay the sticker price for a car because you already know you can make the monthly payment, negotiating the purchase price could make that payment even lower. The keys to successful negotiating are to do some online homework to determine what the make and model you are interested in is going for, and then to confidently ask the dealer for a better price while conveying a willingness to walk away if the dealer doesn’t make you a better offer.
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Avoid Loans with Long Terms
Long-term auto loans are tempting because they can keep your monthly payments low. But paying all of that extra interest over time can be way more costly in the long run. Another downside of a long-term auto loan is that the payments could continue well after your car’s tires—and your enthusiasm for driving it—have worn thin. Keeping the loan term to five years or less is a good way to make car ownership both affordable and enjoyable.
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Just because you are buying your car from the dealer doesn’t mean you have to finance it through the dealer. There are lots of other places to obtain auto financing, often with rates and terms that are better than what the dealer is offering. By comparison shopping with banks, credit unions and online lenders, you could end up saving thousands of dollars in interest costs.
Refinance Your Existing Bad Loan
There might be a myriad of reasons you currently have a bad car loan. That doesn’t mean that you are stuck with it. Hopefully your credit and other circumstances have improved since you drove off the lot with that lousy deal. But even if that’s not the case you may still qualify for an auto refinance to pay off your old loan and reduce your monthly payment. While some restrictions will apply, an auto refinance can be a smart way to turn a bad loan into a good loan.
* “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.
† These statements are merely informational suggestions only and should not be construed as legal, accounting, or professional advice, nor are they intended as a substitute for legal or professional guidance.
RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.