5 Mistakes To Avoid When Getting A Car Loan
Whether you are getting a car loan or paying for your car with a personal loan, choosing the best finance can be confusing at best. If you are not careful, you could be spending a lot more than you should on your next car loan.
Before taking out a loan to pay for your next car, there are some common financing mistakes that you should avoid.
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1. Add overpriced or unnecessary guarantees to your loan
If you buy a used car, chances are it will no longer be under warranty. This means that if there is any problem with your car that needs to be fixed, you will likely have to pay for it out of pocket. For this reason, most car dealers will try to sell you a dealer warranty or an extended warranty that will cover the cost of some repairs and often routine maintenance.
This isn’t necessarily a bad deal, but in most cases a dealer will try to sell you a guarantee that will cost you hundreds – if not thousands – of dollars. They could even try selling you a guarantee that only covers a limited list of issues that you are unlikely to encounter. Often times when you take out a loan they offer to roll over the cost of the guarantee on your loan and this can add thousands of dollars to your overall loan.
In many cases, extending the warranty for used cars is not worthwhile. That being said, you might want to know that if you have serious and expensive problems, you are covered by your warranty. Do a pre-calculation on how much you can expect to spend on repairs and maintenance and compare that to the price of a dealer warranty that is offered to you, and make sure you know exactly what is covered by that warranty. You can usually negotiate the cost of a warranty a bit, but don’t be pressured into buying one unless you are sure it is what you want.
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2. Stand on your car loan on your head
When you are upside down on a car loan, you owe more than your car is worth. Cars are depreciating quickly, by the hundreds of dollars every month. If you pay off all or almost all of the car with a loan rather than a down payment, you could end up owing $ 18,000 if your car is only worth $ 15,000.
This is not necessarily a problem other than the fact that you will be paying off that loan for a while. However, should you have an accident and fill up your car, your auto insurance would only cover the current value of the car. If your car is worth $ 15,000 and you still owe $ 18,000 on your loan, you end up paying $ 3,000 out of pocket for a car that you can no longer drive.
To avoid this mistake, make a larger deposit. Shortening the loan period can also help – while it will increase your monthly payments, it also means you will repay your loan quickly.
Read this guide to the types of auto insurance to help you decide how much auto insurance is right for you.
3. Accepting dealer funding without prior approval elsewhere
Getting the best low interest car loan can save you hundreds of dollars in interest annually. To do this, you should shop around and compare the rates of a wide variety of lenders.
While dealer financing is convenient, you can get a better deal by applying for pre-approval from a variety of banks and credit unions before you start your car purchase. This also gives you a better idea of how much you can borrow and what interest rates you qualify for, which will help you set a budget. Also, these institutions may offer you a better deal than a car dealer.
4. Take your bank’s or credit union’s course without asking if your dealer can beat it
After you’ve received pre-approval from a few different institutions, you can print out your pre-approval letters and bring them with you to the dealership. If you ask the retailer if they can beat the prices already offered to you, you can also make huge savings.
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Some people prefer to go with their bank or credit union rather than dealing with dealer financing. You may think this is easier or safer than sticking to what your car dealership is offering. However, in most cases, it is best to reach out to the one who can offer you the best loan. Securing the lowest possible interest rate should be your number one priority, but make sure you get a repayment term that is comfortable for you as well. And avoid loans that have prepayment penalties if you repay the loan early.
5. Choosing the wrong repayment term
Auto loans typically have terms of 24 to 72 months. You might be tempted to get the longest loan term as your monthly payments are lower. However, if you extend your credit over a longer period of time, you will pay more interest. It can also mean turning your loan on your head if you pay it off more slowly than the value of your car falls.
On the other hand, choosing a short loan term means higher monthly payments. If these are hard to afford, you could miss out on a monthly payment, which can put you in further debt and affect your creditworthiness. A slightly longer repayment term with smaller monthly payments gives your budget a little more leeway.
You can pay off your loan early at any time. It is wise to keep the repayment term as short as possible, but you can go for one where you have lower monthly payments than you can actually afford to give yourself some flexibility.