Will Hamilton writes about smart money management, financial literacy, and lifestyle topics.
Got your eye on a new set of wheels? If you plan on financing your purchase, it’s important to research your options before committing to a loan. Don’t get side-tracked by the finance professional or salesperson – some are trained to convince you to spend more money. Here are seven mistakes you don’t want to make when getting your next car loan.
1. Getting Sucked Into an Extended Warranty
Extended warranties on cars are largely overrated, and there are statistics to back that up. According to a survey conducted by Consumer Reports, 55% of car owners who purchased the warranty never used it for repairs. However, if you think you’ll use the extended warranty, or you just want it for the peace of mind, do your research to find out exactly what it covers and how long the coverage lasts.
2. Negotiating the Monthly Payment
Your monthly payment can be deceiving – a lower payment doesn’t always mean you’ll pay less for the car. In fact, if you negotiate a lower monthly payment by extending the loan’s pay-off time, you’ll probably end up paying significantly more. Instead, negotiate the total purchase price of the car and the interest rate. You can use our vehicle payment calculator to determine how much your monthly payments will be.
3. Failing to Research Interest Rates
Interest rates vary between auto loan providers, so do your homework. Start with your current bank, but branch out and check local credit unions as well. Don’t simply agree to finance through the dealership – you might end up paying more than necessary – but do ask the dealer what rates are being offered. Sometimes dealerships offer stellar rates to help move cars.
To research interest rates for auto loans online, check out Bankrate.com. Once you find the lowest rate, go ahead and get pre-approved. This takes some of the hassle out of the financing process.
4. Not Knowing Your Credit Score
If you don’t know your credit score before you walk into the financing office, the finance person has the upper-hand. Your credit score has a significant effect on the interest rate you pay, so make sure you know where you stand. Go to the website Credit Karma to get a free credit score estimate, or if you want a 100% accurate credit score, pay $4.95 at the MyFICO website.
5. Choosing the Wrong Incentive
During many car sales, you have the option to take a cash back rebate – an amount discounted from the car’s purchase price – or a more attractive interest rate. There’s no right or wrong answer – sometimes one offer is simply better than the other – so run the numbers on both to make the best decision.
6. Needlessly Agreeing to Extras
Don’t be surprised if you’re offered a few extras, such as fabric protection or paint sealant. Don’t take the bait. Usually you can purchase these aftermarket, pay for them out of pocket, and avoid wrapping them into your loan. This means you won’t end up paying interest on extras.
7. Not Putting Enough Money Down
The best way to reduce your overall loan payment is to make a large down payment. As long as you have a few months to plan your car purchase, go ahead start saving money in advance. Once you have a few thousand dollars set aside, go ahead and make your purchase.
How have you scored a great car loan?