Buying a new or pre-owned vehicle can be an overwhelming and expensive experience. Don’t make it even more of a bank account drainer by falling for common car loan money traps. If you want to make sure you are getting the most for your money, avoid the following missteps when finalizing your car loan.
Limiting your options
When you’re at a dealership, it’s easy to get swept away in the convenience of finalizing your loan with their finance team. You’re already there! In some cases, you might find the best deal at the dealership, but you won’t know for sure unless you do your research before you go. Plus, it gives you more bargaining power at the dealership when you have more information.
“Once you are preapproved for a loan, you can negotiate with the dealership more effectively. After all, if the dealership isn’t willing to beat the rate you already have, you don’t have to rely on their financing to get the car you want,” according to Rebecca Betterton, writer for Bankrate.com.
Focusing on monthly payments instead of term
When you’re figuring out what you can pay for your vehicle, it’s tempting to figure out the lowest possible monthly payment and go with it. However, this can be a shortsighted decision that may cost you more in the long run.
“The term is how many months it takes to pay off the loan. The longer the term, the lower the monthly payments. However, the longer you take to pay off a loan, the more interest you will pay,” according to Philip Reed, writer for NerdWallet.com.
Longer loan terms will also be impacted by the age of the vehicle. If you take a long time to pay off your car, you’ll have to factor in costs for maintenance and repairs since an older car will start to break down, he adds.
Know your worth
It’s easy to take the word of experts, especially in a high-pressure sales situation. You’ve already fallen in love with the car, and you may feel desperate to appease the dealership so you can take that vehicle home. The best way to feel confident in your discussions at a dealership is knowing your credit score before you show up to shop.
“Your creditworthiness determines your interest rate, and a borrower with a high credit score qualifies for a better car loan rate than one with a low score,” advises Betterton. “Knowing your credit score ahead of time will put you in the driver’s seat in terms of negotiation.”
Dragging debt into your new purchase
If you’re struggling to settle your current loan, it may be best to avoid the temptation to take the dealership’s offer to carry over your negative equity into your new loan. It may seem like a great solution, especially if you’re ready to ditch your current ride, but it’s not, as you’ll end up paying more than you should.
“In that way, a person who is $10,000 upside-down on a car loan can buy a $30,000 car and wind up with a $40,000 loan,” warns Reed. He notes that rolling negative equity in a new loan may just increase your dive into debt. “Instead, keep driving your current car and try to make extra payments until you’re right-side up.”
Be sure to do your homework before you enter a dealership. Learn your credit score, determine your budget, and understand exactly what you can afford in a car loan to get the best deal possible. If you’d like to speak with a personal banker about Waukesha State Bank’s car loan rates, give us a call at (262) 549-8500.