6 Ways to Avoid a Bad Car Loan

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.


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. Getting a credit report at least yearly, making sure that your score is accurate, and then doing your best to keep your credit in good shape is vital for avoiding 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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Shop Around

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 could 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.

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