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6 common car loan mistakes that cost you money Part Of Buying a Car In this series Buying a Car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. This allows users to conduct research and compare information for free — so that you can make sound financial decisions. Bankrate has agreements with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that appear on this website are provided by companies that pay us. This compensation could affect how and where products appear on the site, such as such things as the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. However, this compensation will not influence the information we provide, or the reviews you see on this site. We do not include the entire universe of businesses or financial offers that may be accessible to you. My Ocean Production/Shutterstock

5 minutes read. Published March 02, 2023.

Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in understanding the ways and pitfalls of borrowing money to buy a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are enthusiastic about helping readers gain the confidence to control their finances through providing precise, well-researched and well-written facts that break down complex topics into manageable bites. The Bankrate promises

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You have money questions. Bankrate can help. Our experts have been helping you manage your money for more than four decades. We are constantly striving to give our customers the right advice and tools needed to make it through life’s financial journey. Bankrate follows a strict , which means you can be sure that our information is trustworthy and precise. Our award-winning editors, reporters and editors produce honest and reliable content that will help you make the right financial choices. The content we create by our editorial staff is objective, factual and uninfluenced through our sponsors. We’re open regarding how we’re capable of bringing high-quality content, competitive rates, and helpful tools to you , by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or when you click on certain hyperlinks on our website. So, this compensation can affect the way, location and in what order items appear in listing categories and categories, unless it is prohibited by law for our mortgage, home equity and other products for home loans. Other factors, like our own rules for our website and whether a product is available in your region or within your personal credit score can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include details about each credit or financial product or service. If you are looking to save money on your next car purchase, you will need to do more than strike a good deal with the salesperson on the . Making a mistake when purchasing a could cost you money and wipe out the savings you bargained for on the purchase price. Unfortunately, it’s not all that common, particularly among borrowers with high credit scores. A study by the Federal Reserve showed three percent of super-prime and prime consumers received auto loans that had an APR of 10 percent or more, which is more than double the average rate for their credit scores. Don’t shop around for the best deal in auto loan financing one of the mistakes to avoid. Here are some others to be aware of if you wish to get the best deal possible. 1. Not shopping around is an easy and convenient way to secure an auto loan however it comes at an added cost. Dealers often increase their rates by a few percent to ensure they profit. Before going to the dealer, shop around and from credit unions or banks. Doing so will provide you with an understanding of the interest rates you can get to your credit score and make sure you get the best deal. Remember that the requirements of banks may be more strict than credit unions’ however, they might provide better rates than what you find at the dealership. If it’s your first time purchasing a vehicle, look for financing programs for first-time buyers at credit unions. After you’ve been approved for the loan then you can negotiate with the dealership more efficiently. After all, if the dealer doesn’t beat the rate you currently have, you don’t need to rely on their financing in order to obtain the car you’ve always wanted. What’s the most important takeaway

Preapproval can ensure you receive the best rate available and give you an advantage to bargain.

2. The monthly payment should be negotiated instead of the purchase price Although the monthly payment for your car loan is important — and you should know it ahead of time every month — it shouldn’t be the sole basis of your . After you’ve volunteered, the month-long car loan amount informs the seller how much you’re willing to pay. The salesperson might also try to hide other costs, for example, an increased interest rate or other fees. They may also try to sell you on a more lengthy payment timeframe, which can help keep your monthly payments within your budget, but will can cost you more overall. In order to avoid that, you should negotiate the purchase price of the car and then each time instead of focusing on your monthly installment. Key takeaway

Do not buy a car solely on the monthly payment alone and the dealer may make use of that number to put negotiations on hold or upsell you.

3. The dealer should be able to define your creditworthiness Your creditworthiness determines the rate of interest you pay, and a borrower with good credit scores can get the best car loan rate than someone with a lower score. By reducing only one percentage point of interest from a $15,000 vehicle loan over a period of 60 months could save hundreds of dollars in interest throughout the duration of the loan. Being aware of your credit rating ahead of time puts you in the driver’s seat when it comes to negotiations. By knowing your credit score, you’ll be aware of the rate you should expect — and if you are being pushed by the seller overcharge you or lie about the amount you are eligible for. What is an unacceptable APR for an auto loan? New auto loans had an of 6.07 percentage in the 4th quarter 2022, according to figures from . Credit scores of people with good credit qualify for rates as low as 3.84 percent, whereas those having bad credit had an average new car rate that was 12.93 percent. The rates for used cars were higher than 10.26 percent across all credit scores. And the was a sky-high 20.62 percent. So the «bad» APR for car would be on the upper portion of these figures. In law, loans cannot have an interest rate over 36 percent. Find an lender that offers you an average rate for your credit score, or higher. Key takeaway

Shop around with many different lenders to find out your expected interest rates and do whatever you can to improve your credit score prior to heading to the dealership.

4. Do not choose the correct term length can be a challenge. The range of durations is from 24-84 month. The longer term may be tempting with and lower monthly payments. However, the longer, the higher cost of interest you’ll be paying. Some lenders also charge a higher interest rate when you choose to take an extended repayment timeframe because there’s a higher chance that you’ll be upside-down with the loan. To decide which is the most suitable option for you, think about your priorities. If, for instance, you’re the kind of person who wants to get driving the latest car every few months, then the long-term loan may not be the best option for you. On the other hand, if you have an extremely tight budget and a long-term loan may be the only option you can afford the car you want. Make use of a tool to analyze the cost of your monthly payments and choose which one is the most suitable for you. What you should take away from this

A short-term loan is likely to cost less interest in the long run however it will come with high monthly payments. A longer-term loan will have lower monthly payments but higher cost of interest over time.

5. Financing the costs of added-ons Dealerships make money from the sale of items that are offered via the Finance and Insurance department. If you’re in the market for gaps insurance policy, those options are available at a lower cost through sources other than the dealership. The addition of these items to the financing you choose to use will result in more expense in the long run as you’ll be charged interest on them. Question every fee you aren’t sure about to avoid unnecessary additions to the purchase price. If you find an additional item you really want then pay for it out of your pocket. If you want to make sure, ask whether it’s available at a different dealership for less. The purchase of a third party is often cheaper for aftermarket products such as extended warranties and . The most important thing to remember is

In the long term adding financing options will increase the amount of interest you pay in the end. Prepare yourself for negotiations by knowing which add-ons you truly need and which are cheaper elsewhere.

6. Moving negative equity forward » » on a car loan is when you have more debt on your car than it is worth. The lender may let you transfer that equity into the new loan but it’s not a smart choice for financial reasons. If you do, you’ll be charged interest on your previous and current car. If you were upside-down at the time of your trade-in it is likely that you will be the next time around. Instead of rolling your negative equity into your new loan, try before making the move to take out the new loan. You can also pay off the negative equity prior to transferring it to the dealer to save yourself from paying excessive interest. Key takeaway

Don’t roll negative equity in your car forward. Instead, you should pay off as much of the old loan as possible or take the amount that is left when you trade in your vehicle.

The bottom line The key to success when you take out a car loan is preparing. This means negotiating the monthly payment, understanding your credit rating, deciding on the right term length, making sure you are aware of additional costs and avoiding rolling over negative equity. Be aware of any mistakes that could occur when you negotiate. If you do, with the right luck, you’ll be able to save money and time. Learn more

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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ins and outs of securely taking out loans to purchase an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain confidence to manage their finances through providing precise, well-studied information that break down complex topics into manageable bites.

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