5 car loan mistakes that cost you money

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If you want to save money on your next car purchase, you’ll need to do more than just strike a “good” deal with the salesperson on the sticker price. A mistake on your car loan could cost you money and erase the savings negotiated on the purchase price. Keep these tips in mind to ensure that you walk away with the best deal possible.

What is a good interest rate for a car loan?

Your car loan interest rate depends on a variety of factors, such as the type of vehicle, your credit history and the length of your intended auto loan. All lenders use these factors differently, so the best way to find a good auto loan rate is to shop around with a few different lenders.

You should also take the time to improve your score before starting your search for a loan. A “good” interest rate for a car loan is anything below the average for your credit score. According to Experian, those averages come out to:

Credit score Average interest rate (new) Average interest rate (used)
781–850 2.34% 3.66%
661–780 3.48% 5.49%
601–660 6.61% 10.49%
501–600 11.03% 17.11%
300–500 14.59% 20.58%

5 car loan mistakes that can cost you money

Consider these common mistakes drivers make when taking out a car loan.

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 forfeit 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, and they could attempt 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.

Key takeaway
Never purchase a car based on the monthly payment alone; the dealer could use that number to place negotiations at a standstill or upsell you.

2. Letting the dealer define your creditworthiness

Your creditworthiness determines your interest rate; 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.

Understanding your credit score ahead of time will put you in the driver’s seat in terms of negotiation. It is also wise to 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.    

Key takeaway
Shop around with many different lenders to get an idea of your estimated interest rates, and take any steps to improve your credit score before going to the dealership.

3. Not choosing the right term length

Car loan repayment can range from 24 to 84 months. It is easy to be attracted to a longer-term loan, because typically the monthly payment is lower. But the longer you’re in repayment, the more you’ll pay in interest. There are advantages and disadvantages to both a short- and long-term loan option.

In order 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.

Key takeaway
A short-term loan will cost you less in interest overall but will have high monthly payments; a long-term loan option will have lower monthly payments but higher interest costs over time.

4. Financing the cost of add-ons

Add-ons are a large part of the profits earned in both new and used car sales, especially when generated in the finance and insurance office through aftermarket add-ons. Even 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 those add-ons, so question every fee you don’t understand.

Key takeaway
In the long run, financing add-ons will lead to more interest paid overall. Come prepared to negotiations knowing which add-ons you truly need and which you can find cheaper elsewhere.

5. Rolling negative equity forward

Being “upside-down” on a car loan is when you owe more on your car than it is worth, resulting in negative equity. When a dealer tells an upside-down consumer that they can fold that negative equity into the new car financing, they mean that this negative equity will be added to the purchase price of the new car. You will then be paying interest on that negative equity for the term of the new loan. Moreover, if you were upside-down on your last trade-in, chances are you will be that much more upside down next time.

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.

Key takeaway
Don’t roll negative equity on your vehicle forward. Instead, pay off as much of your old loan as possible or pay the difference when you trade in your vehicle.

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 negative equity.

By walking into a conversation with a potential lender with these mistakes in mind, you will walk away with saved money and time.

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Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Student loans editor