Buying a car sounds as easy as swinging by a dealership and going home with something shiny and new. Those planning to borrow money to purchase their car should do more than just trying to lower its purchase price. There’s the car loan, its costs and fees and monthly payments to be made throughout the loan’s life to consider. In your rush to buy a car, it’s easy to abandon care and commit some mistakes that will be costly later on.
The Seven Car Loan Mistakes
Without further ado, here are seven mistakes to avoid when financing a car, at all costs.
1. Not knowing your credit.
Know your credit before you step into any car showroom. Check your credit score so you can negotiate your interest rate and other terms properly. Before dealers size you up, figure out your creditworthiness by obtaining a copy of your credit report.
2. Not paying attention to the purchase price.
You can negotiate the car’s purchase price and possibly lower the amount you need to borrow. But in your bid to lower it, experts warn against letting slip the monthly payment you think you can afford. The dealer can come with a loan around this “ideal monthly payment” complete with other fees.
3. Not haggling for a lower rate.
Aside from the purchase price, there’s the car loan interest rate to be dealt with. Behind higher interest rates are hidden fees and costs that a dealer can charge. So always negotiate your rate and look into the loan’s overall costs. Any add-ons should not be financed into the loan. You are basically paying higher and longer for services that can be obtained cost-effectively elsewhere.
4. Not looking at the term.
“Only $____ a month.” It sounds affordable and hooks you into getting a loan with a longer term. A longer-term loan with its lower monthly payment takes a while to be repaid, racks up more interest costs, and undergoes a slower buildup of equity, which could lead to an “upside down” situation.
5. Not saying “no” to an offer to add existing upside-down loan balance into a new loan.
You are “upside down” when you owe more on your car than what it’s worth. When you trade-in your upside down car, pass up an offer to add this outstanding balance to the new loan. What you’ll get is a higher loan amount and more debt that only adds to your negative equity position woes.
6. Not including insurance costs in the computation.
In figuring out the terms of your loan, don’t forget the insurance costs. Insurance rates vary if the car is bought in cash or financed. It’s because your lender will have a say in the terms of your insurance and typically set a limit to the deductibles. It serves as a protection to the lender and an added cost to you as insurance rates are higher when deductibles are lower.
7. Not having a back-up plan.
When you visit dealerships, they offer financing straight from their finance office. This is a fairly common, convenient practice. But do take a step outside and directly contact lenders. Prequalify for a loan and compare your bank’s initial officer with that of the dealer.