Buying a new car is exciting - the research, the test drives, that moment of truth decision. Getting a car loan to pay for that new car? Not so much. The number crunching, the F&I office, finding a good interest rate. Not only can it be unpleasant, going in unprepared can be a costly mistake that will haunt you for years. Whether you’re a first-time car buyer or looking to replace your vehicle, you should understand the no-nos of auto financing before stepping foot into a dealership. These are the top five common and costly mistakes to avoid when getting a car loan.
1. Not Familiarizing Yourself with your Credit Score
Your credit report plays a significant role in determining the interest rate for your auto loan. Someone with a good credit score will be offered a better interest rate than someone with distressed credit. If you go in blind about your credit score, the finance office at the dealership may try to convince you that your rate should be higher because you have bad credit. Many people underestimate their credit scores and just go along with the first rate offered. Being aware of what range your score falls into lets you leverage your negotiating power to get a better interest rate. Getting suckered into a high interest rate can mean overpaying hundreds of dollars over the course of your loan.
2. Forgetting Auto Loan Pre-Approval
Auto loan pre-approval allows you to shop around for a good interest rate. You'll be able to get pre-approved at a bank, credit union or online lender. Getting pre-approved means you are offered a loan amount and interest rate from a lender before you go to the dealership. This process prevents you from taking the first loan offer the dealership gives you which may not be the best. It also allows you to better negotiate with the dealership because you can show your pre-approval rate to the finance office and try to have them match or beat it to win your business.
3. Negotiating on the Monthly Payment
When you're at the dealership, the salesperson may ask you what number you're looking at for your monthly payment. Do not (we repeat, do not) reveal this information. While you should be aware of how much you can afford to pay each month, sharing this number with the salesperson will give them the ability to hide additional fees and potentially higher interest rates. Your best strategy will be to negotiate the price of the car, the financing, and your trade-in separately.
4. Taking on a Long-Term Loan
New cars depreciate quickly losing about 11% of value as soon as they are driven off the lot. When you take out a long-term loan (over 60 months) you'll increase the odds that you’ll become upside down, meaning you'll owe more than the car is worth. If you choose to sell it before the loan term is up, you'll owe more money than you will get for the car. If you keep the car, you'll be responsible for the necessary repairs that come with an older car in addition to the high payments. Your interest rate will also increase and possibly even double which adds up to hundreds of dollars that you could have saved over the course of your loan.
5. Financing the Cost of Add-Ons
Add-ons at the dealership include antitheft devices, window tinting, floor mats, interior protection, extended warranty, and more. While some of these may be useful, when they are rolled up into your auto loan, you'll end up paying extra in interest over the course of the loan. Usually, the costs of add-ons at the dealership are marked up and most of them you can add later. The F&I department makes a good profit when they sell you add-ons. In fact, many dealerships lose money on the sale of a new car but make up for it in add-on sales. Therefore, don't be surprised if they try and push some on you. We'd recommend you pass on their offers and look into your desired add-ons after you purchase the car.