Think back to the last time you bought a car. You probably had an idea of the features you wanted, the general amount you could afford to spend, and maybe even knew exactly what vehicle you wanted. If you’re like half of Americans, you’re also using a car loan to buy that car, rather than paying cash.
You would think that with 44% of the country financing their car purchases, we would be well versed in optimizing those loans. The truth is, however, that the average car buyer overpays a lot, losing thousands of dollars over the term of their vehicle’s repayment.
So how do you finance your next car purchase without wasting money? Here are six common mistakes consumers make that cause them to overpay their auto loans, and how you can avoid doing the same the next time you walk the lot.
1. Focus only on monthly payments
You probably already know how much you can afford to spend on your car loan each month. Whether you’ve meticulously squeezed the budget or just quit paying for your current car, you’re unlikely to walk into the dealership without a number in mind. However, putting all of your attention on this figure may not be the best idea and may result in you spending more on your loan.
Some car salespeople will ask you how much you want to spend on your monthly car payment. Although they will then make you an offer for that monthly payment, it may not be the best deal possible.
There might be hidden costs or unwanted additions to this total loan, which you might not notice. If you walk into the dealership with a monthly payment as your goal rather than a total loan amount, you may be less likely to pick every item in the line with a fine-toothed comb.
When doing your research before buying, figure out both how much you want to spend in total and how much you can afford to pay monthly. Next, make sure you’re able to negotiate both when you’re at the dealership.
2. Assuming dealer financing is your only option
Dealerships offer in-house financing, making it easy to buy your car and set up your loan at the same time. But if you’re like 60% of Americans, you might not know that dealer financing isn’t your only or even your best option for buying a car.
Studies have shown that consumers waste up to $3,000 on their auto loans. Combine that with dealer interest rates, which may not be the lowest you’ll find, and you’re well on your way to spending far more than you need over the life of your loan.
In fact, a recent study by Outside Financial, an auto loan company, found that car buyers spend an average of $1,717 extra when taking out a car loan directly from the dealership. That’s a lot of money to spend on hidden markups. It is important to research other loan options; you have a lot of money at stake.
3. Give a low down payment
When you finance the purchase of a vehicle, you often have the choice of how much you want to set aside. Not only does this down payment secure the loan, it immediately strengthens the equity in your purchase.
Since a down payment reduces the amount you need to finance, it also reduces the total price you will pay for the vehicle. This is because you won’t have to pay interest on that part of your purchase, since it’s unfinanced. This can save you hundreds on your refund.
Putting down a decent down payment on your next vehicle purchase can also help you in the future, whether you want to refinance or are unlucky enough to total your vehicle. Cars depreciate quickly, which means you could easily find yourself Upside downor owe more on the car than it is actually worth.
Being upside down will make refinancing impossible down the line. This means that you will not be able to take advantage of a reduced interest rate or reduce your monthly payments. If you happened to total your vehicle, insurance would likely pay you for the value of the car, less depreciation. However, if you owe more than that on your loan (and you don’t have GAP insurance), you will be required to write a check to your lender for the difference.
Your best bet is to pick a healthy down payment. This will save you money in interest charges and headaches down the line.
4. Choose long loan terms
The longer you delay paying off your car loan, the less you will pay each month. But while it may seem quite attractive in the short term, it’s not the best choice financially.
Generally, a longer loan term means a higher interest rate. Lenders typically reserve their best rates for short-term loan repayments, so you’ll pay more for your new car in the long run, even if it’s cheaper down the road.
A long term loan also means you are more likely to find yourself upside down on your loan at some point. The longest auto loans typically last 6-7 years – depending on the vehicle you drive, how much you paid and how you drive it, it can easily take long enough to lose amortization faster than you cannot refund. a loan.
Rather, it is better to choose a loan repayment as fast as possible, ideally no more than 60 months. It could even mean buying a less expensive vehicle that you prefer.
5. Missing Hidden Fees
We’ve already talked about the sneaky fees that often end up in dealership auto loans, costing consumers thousands of extra dollars on their vehicle purchases. But even if you walk into the dealership with your own secured financing, you may still find yourself paying those unnecessary fees. It’s all about reading the fine print of your purchase agreement.
These charges may include extended warranties that you did not request or want. You may also be required to pay for things like fabric/leather protection, vehicle delivery, and advertising costs. Some of these may be reasonable, but watch out for duplicates – and, of course, negotiation is always the name of the game in car buying.
Remember that every extra penny you spend on your vehicle is even greater once you factor in the cost of financing your loan.
6. Don’t Refinance When You Can
There are a number of reasons why you’ll want to consider refinancing your loan down the line. Not seizing the opportunity when it presents itself can even cost you hundreds or even thousands of dollars.
If your credit score has improved since purchasing your vehicle, or if the economy has changed and interest rates have fallen, you may want to consider refinancing. Even lowering your interest rate by a percentage point or two can make all the difference over the life of your loan.
You can also consider refinancing if you want to lower your monthly payment or need to remove a co-signer from your original loan.
If you are currently struggling with a high car payment, you may want to consider refinancing with loan club Where Prosper. Want to know more? Read our Prosper vs. Lending Club Smackdown to find out which option is right for you.
Buying a vehicle is an expensive business, no matter the specifics of your new car or the financing you choose. This makes it even more important to save every penny you can on your auto loan.
Watching for unnecessary fees, finding the right lender, getting the lowest interest rate possible (even if it’s a refi down the line), and handing over a healthy down payment can all work in your favor. When it comes to buying a new car, avoiding overpaying on your car loan is even nicer than that new car smell.
Get Free Auto Loan Finance Quotes Online Get multiple quotes online for free in minutes. All levels of credit accepted.
View dealer pricing online No more traveling from one dealership to another. See prices online for free on any car, new or used.
Save on home and auto insurance and get a quote in minutes Match your current insurance coverage. Compare rates and SAVE!