If you want to save money on your next car purchase, you will need to do more than just strike a good deal with the salesperson on the sticker price. A mistake when taking out a car loan could cost you money and erase the savings negotiated on the purchase price. Avoid these car loan mistakes if you want to walk away with the best deal possible.
1. Negotiating the monthly payment rather than the purchase price
Although your car’s monthly price is important — and you should know in advance how much car you can afford each month — don’t show your entire hand to the salesperson. If you do, you will give up your capacity for negotiating a lower purchase price.
Once volunteered, a monthly car loan amount tells the dealer how much you are willing to spend. The salesperson could also try to hide other costs, such as a higher interest rate and add-ons. They might also pitch you on a longer repayment timeline, which will keep that monthly payment within your budget but cost you more overall.
To avoid this, negotiate the price of each cost category separately and focus on overall cost.
2. Letting the dealer define your creditworthiness
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. Shaving just one percentage point of interest from a $15,000 car loan over 60 months could save hundreds of dollars in interest paid over the life of the loan.
Knowing your credit score ahead of time will put you in the driver’s seat in terms of negotiation. With it, you will know what rate you can expect — and if the dealer is trying to overcharge you or lie about what you qualify for.
What is a bad APR for a car loan?
New auto loans had an average rate of 7.23 percent in the second quarter of 2022, according to data from Experian. People with excellent credit qualified for rates around 2.96 percent, while people with bad credit had an average new car rate of 12.84 percent.
Rates for used cars are higher — 11.35 percent across credit scores. And the average for bad credit was quite high, sitting at 20.43 percent.
So, a “bad” annual percentage rate for a car would be on the upper end of these numbers. Legally, loans can’t have an APR over 36 percent. A bad APR will be subjective based on your credit score, but in general, you should find a lender that offers you an average rate or better.
3. Not choosing the right term length
Car loan terms range from 24 to 84 months. It is easy to be attracted to a longer term because typically, the monthly payment is lower. But the longer you spend repaying your loan, the more interest you’ll pay.
To decide which is the best option for you, consider your priorities. For example, if you are the type of driver who is interested in getting behind the wheel of a new vehicle every few months, being trapped in a long-term loan might not be right for you.
On the other hand, if you have a limited budget, a longer term might be the only way you can afford your car. Use a car finance calculator to understand what your monthly payment will be in order to decide which option is best for you.
4. Financing the cost of add-ons
Dealership profits are largely influenced by add-on sales — especially aftermarket products sold through the finance and insurance office. If you want an extended warranty or credit life insurance, these items are available at a lower cost from sources outside the dealership.
Wrapping these add-ons into your financing will also cost you more in the long run, since you’ll be charged interest on them. Question every fee you don’t understand to avoid unnecessary additions to your purchase price.
If there is an add-on you truly want, pay for it out-of-pocket. Better yet, check if it’s available outside of the dealership for less. For aftermarket products, extended warranties and gap insurance, going to a third party is often cheaper.
5. Rolling negative equity forward
Being “upside down” on a car loan is when you owe more on your car than it is worth. Lenders may allow you to roll over that negative equity into a new loan, but it’s not a smart financial move. If you do, you will pay interest on both your current car and your previous car. And if you were upside down on your last trade-in, chances are you will be again.
Instead of rolling your negative equity into your new loan, try to wait to pay off your old loan before taking out the new one. You can also choose to pay off your negative equity upfront to the dealer to avoid paying excess interest.
6. Not shopping around
Dealership financing is easy and convenient. But that makes it more expensive. Dealers know they can mark up their rates by a few percentage points.
Shop around and get a few quotes from banks or credit unions before visiting the dealership. Doing so will give you an idea of the interest rates available for your credit score and ensure that you are getting the best deal.
Once you are preapproved for a loan, you can negotiate with the dealership more effectively. After all, if they aren’t willing to beat the rate you already have, you don’t have to rely on their financing to get the car you want.
The bottom line
The key to success when it comes to taking out a car loan is preparedness. This means negotiating the monthly payment, knowing your credit score, choosing the right term length, being aware of add-on costs and avoiding rolling over negative equity.
By working with a potential lender with these mistakes in mind, you will walk away with saved money and time.