By: Raymond James
About the Author:
Ray is a sought after thought leader and an expert in financial and money management. He has been published and featured in over 50 leading sites and aims to contribute articles to help novice financial planners. One of his goals is to impart his knowledge in finance to educate and help ordinary people create and achieve their financial goals.
Purchasing a car is a decision many people tend to rush into without considering the potential pitfalls that may come with the rushed purchase. Clients taking a first-time auto financing and even those that have taken financing before can learn through the mistakes of others and avoid the probable pitfalls associated with auto financing. Here are five car loan mistakes that people make that will cost you money.
Table of Contents
Not Scrutinizing Your Credit Score and History.
Before someone offers you a loan, they will be interested in your credit score. Auto lenders check a person’s credit score to determine the kind of interest rate they should place on the loan. The credit score also gives the borrower a rough idea of what to expect while taking the loan.
If your credit score is stunted and you are not in a hurry to purchase, you could consider building a good credit score before you apply for car financing, or you could look for firms that work with people with low credit scores.
To know your credit score, contact your credit card account for a free credit rating. There are also very many paid-for-options that you could use to get a rating.
Lack of Thought of Budget
Buying a car on auto financing is not something you do on impulse, and it’s crucial for a borrower first to work out how much they want to spend on the car, considering the trade-in allowance and the down payment.
Use auto finance calculators to estimate the period that the loan payments will spread and the total amount you used. Failure to budget on paying the monthly loan will leave you lagging behind thousands of dollars in unpaid interest. This could easily damage your credit score, which in turn will impact your ability to apply for loans in the future.
Taking a Long Loan
The longer you take to pay the loan, the more you will pay as interest. You also risk becoming upside-down. In an upside-down situation, the loan payment rate is lower than the vehicle’s depreciation rate, and the borrower is left with a bigger loan to pay than their car is worth. Another risk could arise if the borrower chooses to change vehicles before their loan repayment period is over. Ordinarily, many people roll over the loan balance into a new loan compounding the problem.
If you want to change the car or trade it in, you would have to also pay for the difference between your loan balance and the value of your vehicle. In case of an accident, while still upside down on your loan, it means that the insurance company will only cover the car up to its value and the difference you will pay from your pockets.
Not Looking for Better Loan Options.
If you go to the dealer for car loan financing without looking out for other options, then you may end up with a bad deal while there are better deals out there. If you get preapproved for a loan at credit unions, banks, and online lenders, then you will have a projection of how much can be approved for you and at what interest rates.
This process should be done before you begin shopping for the car you want to buy. The process requires a soft loan credit inquiry that does not impact your credit score.
Financing the Add-Ons That One Can Buy Separately
According to Brisbane car finance, nearly 37% of gross profits earned in selling new and used cars are generated in the finance and insurance department through the aftermarket add-ons. Selling extended warranties, increased interest rates, and add-ons such as paint sealant and fabric protection make extra profits for the dealership. Saying no is the best advice in this case.
Credit life insurance and extended warranties can be sourced outside the dealership at a lower price. Adding them onto a car loan may add hundreds of dollars to the amount you will pay. Dealers also have a habit of giving official-sounding names to extra charges to make them look official. Dealerships use these methods to increase profits at the back end of a deal when the buyer has put his guard down.
Drive with Assurance
Getting the right car loan financing can be a daunting task, but it doesn’t have to be. Simply don’t rush the process. Make sure to scrutinize all terms and conditions and come up with a loan repayment method before signing in on the car financing.