Unless you’re flush with cash, financing a vehicle is often critical when it comes to buying a new car. Taking out an auto loan ensures that you can actually purchase a car—especially if you don’t have any intention of paying cash or supplying a down payment. Because having a vehicle is a necessity for many individuals, understanding the ins and outs of acquiring an auto loan is useful.
Auto loans are ubiquitous, and they allow many people to purchase a car, but that doesn’t mean they come without issues. When it comes to taking out an auto loan, there are several things to watch out for. First and foremost, you want to ensure that you can afford the monthly payment. However, taking out an auto loan extends beyond affordability. To prioritize a healthy financial future, there are some auto loan mistakes you’ll want to avoid.
Not Doing Your Research
If you show up to a dealership without understanding your financial situation or credit score, you’re definitely not setting yourself up for a solid financial future. While it’s crucial to know these personal financial aspects, it’s also important that you do your research and understand what the car buying landscape looks like as you go to purchase.
Research lenders, interest rates, and various loan terms. If you avoid this step, you can lock yourself into a loan with high costs that can potentially strain your finances.
Ignoring Your Credit Score
Your credit score immensely impacts the terms of a loan. Some dealers might take advantage of this lack of knowledge by attempting to lock you into a higher rate. While many dealerships are more interested in presenting as trustworthy sellers, this might not be an issue across the board.
However, knowing your credit score ensures that you can negotiate terms from a place of knowledgeable confidence. Ignoring your credit score might result in higher interest rates or less favorable loan terms. So, before you head out to a dealership, check your credit score!
Overlooking Your Budget
Another possible loan mistake is overlooking your budget. Maybe you don’t even have a budget or you’re not even fully aware of what you can afford. Before you even start any part of the car-buying process, you must know how much money you have coming in and where that money is going. If you can’t afford a certain monthly payment, it’s important you know that before signing off on an auto loan and getting in over your head.
Focusing on Monthly Payments
It can be tempting to solely focus on how much a monthly payment will cost you. Of course, your monthly payment should be realistic and budget-friendly. If you emphasize that your primary concern is the monthly payment amount, some dealers might tack on unnecessary fees or additional costs. It’s also possible that a salesperson will work to lower monthly payments by extending the car loan. This can lock you into a lengthy loan for a vehicle that is completely out of your budget.
Neglecting the Down Payment
Everyone’s financial circumstances are different, and there are occasions where a down payment is completely out of the question (i.e. your car died and you desperately need a new one but you don’t have the cushion for a downpayment). If you are in a position to include a down payment, you could benefit from lower monthly payments, as well as potentially lower interest rates.
Choosing the Wrong Loan Terms
Choosing the best loan terms for your circumstances can be challenging. There can be a variety of factors that impact your overall loan terms: trade-in value, down payments, rebates, and special incentives, to name a few. Your credit score also impacts the loan terms. To help you make the most educated decision about your loan term, run numbers in advance and check out a car loan calculator. You also don’t have to take the first offer; you can negotiate the terms of your loan.
Financing Add-Ons
It can be tempting to add extra features and accessories to your car, but typically, these add-ons have substantial price tags that can easily destroy your budget. Many salespeople will emphasize that you can’t add anything on after you leave the dealership, but you will still have access to plenty of products later on. You can always secure add-ons from other sources, like your car insurance company, and often at a lower price.
Overlooking Insurance Costs
While you’re in car-buying mode, your focus can easily become the monthly payment amount or the overall loan cost. You might overlook the price of auto insurance only to realize that the ongoing costs of it are fairly substantial. Even if you opt out of paying for your premiums monthly and instead choose to pay your premium every six months, insurance costs can cause budgetary strains, especially if premiums are higher than expected.
Not Reading the Fine Print
The terms of your auto loan might appear complex and full of jargon, but that doesn’t mean you should overlook the tiny details and hope for the best. Be sure to thoroughly read the terms and conditions of your auto loan. Failure to do so could result in you agreeing to excess fees, penalties, or unfavorable conditions that are not conducive or beneficial to your finances.
Not Refinancing When Possible
You might buy a car when interest rates are higher. Because interest rates can fluctuate from month to month and year-to-year, it’s important to be apprised of economic changes. If you have the opportunity to refinance your loan for a lower interest rate, you should! Refinancing a loan can provide you with better terms and possibly reduce your overall costs.
Not Considering Alternative Lenders
It can be a relatively seamless transaction for you to finance your car directly with the lenders they have available. However, this locks you into potentially unfavorable loan terms. You might also plan to use a local financial institution, but before you lock yourself into an auto loan. Consider your options. Online banks and credit unions are great options for auto loans.
For one, online lenders don’t have the traditional costs of most brick-and-mortar locations, which means they typically have better deals and interest rates. Likewise, credit unions are member-owned, so they typically have better rates. With such a large purchase, it’s important to consider all of your options, and by exploring alternative lenders, you might secure yourself better loan terms.
Rolling Your Existing Loan Into the New Loan
If you currently owe on an auto loan, it might seem convenient to simply roll the current loan into a new one. This process is called negative equity financing and it involves a dealer or lender rolling the current loan balance into a new auto loan. It’s a quick way to buy a new car, but it leads to increased debt, higher interest rates, and a more expensive overall cost. In particular, your monthly payments will increase. Even more, these financial repercussions can be risky to your long-term financial goals.
Underestimating Maintenance Costs
While maintenance costs aren’t directly tied to your auto loan, the upkeep of your vehicle can still be costly. Because cars require regular maintenance and care, these costs are important to factor into your budget. Whether it’s routine service or unforeseen repairs, these expenses keep your vehicle in working condition, but unfortunately, they can also add up quickly.
Underestimating these costs can jeopardize your budget, while also impacting other aspects of your financial obligations. Including maintenance expenses in your budget can be a good way to ensure that you can afford a vehicle in both the short-term and long-term.
