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5 car loan mistakes that cost you money

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Highlights
  • Negotiate the purchase price, not the car loan's monthly payment.
  • Don't let the dealership define your credit worthiness for a car loan.
  • Finance car add-ons outside the car loan and outside the dealership.

More than just striking a "good" deal with the salesperson is required to save money on your next car purchase. A mistake on your car loan could cost you money and erase the savings negotiated on the purchase price.

"The big mistakes are made in the financing office," says Phil Reed, the senior consumer advice editor at Edmunds.com, the auto research website. "Making the right decisions can save thousands over the life of the loan."

Here are Reed's five car loan mistakes that can cost you money:

1. Negotiating the monthly payment rather than the purchase price. Reed warns that buying a car based on the amount of the monthly payment is a trap. Although you should know what you can afford each month, don't provide that figure to the salesperson. If you do, you will forfeit your capacity for negotiating a lower purchase price. "Don't let them turn you into a monthly-payment buyer," he says.

Once volunteered, a monthly car loan amount tells the dealer how much room is available to hide other costs such as a higher interest rate and add-ons. Reed says to negotiate the price of each cost category separately. "Minimize the individual pieces of negotiation -- price, trade-in and car financing," he says.

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2. Letting the dealer define your credit worthiness. Reed explained that your credit worthiness determines your car financing interest rate. Your credit score (300 to 850) is your credit worthiness as a rating and is based on your credit report with the three credit reporting agencies -- Equifax, Experian and TransUnion. A borrower with a high credit score qualifies for a better car loan rate than one with a low score. Shaving just one percentage point of interest from a $15,000 car loan over 60 months would save hundreds of dollars in interest paid over the life of the loan.

Reed emphasized knowing your credit score before you set foot on the dealer's lot. "Most people think their credit score is worse than it is," he says. "When people don't know their credit rating, the dealer can tell them almost anything."

Reed recommended consumers check their own credit by obtaining preapproved car financing. They should go to a bank or credit union and apply for an auto loan before visiting the dealership. Even if they intend to take advantage of a deeply discounted interest rate offered by the auto manufacturer's lending agency, consumers can find out how much vehicle they can buy and the interest rate they qualify for by getting a preapproved car loan. "It's another way of checking your credit," Reed says.

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Erin Downs, a spokeswoman for San Francisco-based Wells Fargo & Co., says, "We consider your credit rating, your payment history and the amount of debt you already have."

3. Making the wrong choice between cash rebate and low interest-rate loan. If you want to take advantage of a manufacturer's offer of a cash rebate or a low interest car loan, do your homework before deciding. Reed cautions that the method netting you the most savings varies from offer to offer.

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