The wrong choice can cost you thousands.
Whether you are getting a car loan or using personal loan To pay for a car, the process of choosing the best funding can be confusing at best. If you’re not careful, you may end up spending a lot more than you should on your next car loan.
Before you take out a loan to pay for your next car, here are a few common financial mistakes to avoid.
1. Overpriced or unnecessary guarantees in your loan.
If you are buying a used car, chances are there is no longer a warranty for it. This means that if you have problems with your car that need to be repaired, you will likely end up paying out of pocket for them. Because of this, most car dealerships will try to sell you a dealer warranty or extended warranty that will cover the cost of some repairs, and often ongoing maintenance.
This isn’t necessarily a bad deal, but in most cases the dealer will try to sell you hundreds – if not thousands – of dollars in warranty. They may even try to sell you a warranty that only covers a limited list of issues that you are unlikely to encounter. If you take out a loan, they often offer to include the cost of the guarantee in your loan, and this can add thousands of dollars to your overall loan.
In many cases, extended warranties on used cars do not pay off. That being said, you may like the peace of mind that if you run into any serious and costly issues, they will be covered by your warranty. Calculate how much you plan to spend on repairs and maintenance, compare that to the price of any dealer warranty offered to you, and make sure you know exactly what the warranty covers. You can usually lower the cost of the warranty a little, but don’t force buying it if you’re not sure if it’s what you want.
2. Turn over the car loan.
Getting a loan upside down means that you owe more on the loan than your car is worth. Cars are rapidly losing value, hundreds of dollars every month. If you pay for all or most of the car on credit instead of making a down payment, you may end up owing $ 18,000 when your car is only $ 15,000.
This is not necessarily a problem, apart from the fact that you will be repaying this loan for a while. However, if you have an accident and end your car, your auto insurance only covers the current value of the vehicle. If your car is worth $ 15,000 and you still owe $ 18,000 in loan, you end up paying $ 3,000 out of your pocket for a car you can no longer drive.
To avoid this mistake, make a larger down payment. Shortening the loan term can also help – while it increases your monthly payments, it also means you pay off your loan quickly.
Be sure to check out this guide at types of car insurance to help you decide which size of auto insurance is right for you.
3. Accepting financing from the dealership without prior approval elsewhere.
Receiving best low interest loan for your car can save hundreds of dollars a year in interest. To do this, you will need to search and compare the rates of various lenders.
While getting financing through a dealership is convenient, you get a better deal by applying for pre-approval through various banks and credit unions before you start buying a car. It will also give you a better idea of how much you can borrow and what rates you are eligible for, which will help you set a budget. In addition, these agencies can offer you a better deal than a car dealer.
4. Chart the course of your bank or credit union without asking if your dealer can beat him.
After you have received pre-approval from several different agencies, you can print the pre-approval letters and bring them to the dealership with you. Asking the dealer if they can beat the rates they have already offered you can also lead to big savings.
Some people choose to go with their bank or a credit union for dealer financing. You might think it is easier or safer than using what your car dealer has to offer. However, in most cases, it is better to turn to the one who will offer you the best loan. Keeping your interest rate as low as possible should be your top priority, but make sure you can get the loan term convenient for you. And avoid loans that charge prepayment fees in case of early repayment of the loan.
5. Choosing the wrong loan term
Auto loans are usually issued for a period of 24 to 72 months. You may be tempted to get the longest possible loan term because it will lower your monthly payments. However, stretching the loan over a longer period means paying more interest. It can also mean that you end up in an upside-down loan if you pay it back more slowly than the value of your car is depreciated.
On the other hand, choosing a short-term loan means higher monthly payments. If you find it difficult to afford them, you may end up missing out on your monthly payment, which can lead to further increases in debt and worsening of your credit. A slightly longer loan term with lower monthly payments will give your budget a little more wiggle room.
You can always repay the loan ahead of schedule. It’s wise to keep the loan term as short as possible, but you can choose a term that leaves you with lower monthly payments than what you can actually afford to give yourself some flexibility.
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