Like most people, you probably don’t have thousands of dollars lying around to purchase a car. For this reason, buying a car typically involves applying for an auto loan. While auto financing is extremely common, it can also be costly. However, the excitement of buying a new car may cloud your judgment, wherein you agree to less than desirable terms.
Financing a car creates a new monthly expense. And although you may prepare for this expense, you may not prepare for the long-term cost. Are you thinking about buying a new car? Here are five tips to help you avoid some of the most costliest mistakes.
Focusing on the monthly payment.
When buying a car, the sales person may ask you to pick a monthly payment. The finance department then works out a deal to accommodate this figure. This approach may seem convenient and affordable, but to achieve the lowest payment possible, the finance team may likely extend your payments 72 or 84 months. But what you may fail to realize is that the longer your loan term, the more you pay in interest.
Going with the first offer.
Car dealerships have a finance department, but this department isn’t the only option for a loan. Even if you find the perfect vehicle at a particular dealership, you can secure your own financing. Before searching, contact two or three banks and request a no-obligation loan quote. Banks will check your credit, verify your income and then pre-approve a specific amount. Pre-approvals also determine how much you’ll pay in interest. Shop around to get the lowest rate and you’ll save over the life of your car loan.
Applying for a subprime car loan.
You need reliable transportation. But if you have bad credit, a bad credit auto loan may be the only alternative. Unfortunately, these loans don’t come with the best terms. You might pay an interest rate as high as 8% or 9%. Paying for a car with cash can avoid high interest charges. But if this isn’t an option, a cosigner (with good credit) helps lower your rate. Another option: Improve your credit score and then apply for financing.
Forgetting the down payment.
A down payment isn’t usually required on auto loans, but recommended. A down payment not only lowers the amount you have to finance, it also contributes to a lower interest rate on the loan. It’s a dual way to save money. The more you’re able to save for a down payment, the better. Any amount helps, but you might aim for a down payment that’s at least 20% of the purchase price.
Financing negative equity.
If you’re trading in a car with an upside down loan, the dealership will take the negative equity and finance this amount into your new car loan. This is extremely convenient and a great way to get rid of your old ride. But unfortunately, it’s not that simple. Because the dealership adds the negative equity to the price of your new car, you’ll pay interest on this negative equity for the duration of your new car loan.