7 Auto-Financing Mistakes You Need to Avoid
Shopping for a vehicle is exciting and confusing at the same time, and finding the right auto financing is even trickier. With so many options in the market, one fails to understand which auto loan is right for them and which isn’t.
When finding the right auto loan, people make some mistakes that we have listed below, so you don’t repeat them.
1. Not Knowing Your Credit Score or Financial Health
Knowing your credit score or financial health is important for making smart decisions and understanding what you can afford when taking out a car loan. You will likely get a better deal with affordable interest rates if you have a healthy credit history.
Conversely, if you are buried under heaps of debt, you will have difficulty securing an auto loan. Even if you do, you must pay a ridiculous amount of interest. By understanding your credit situation, you will make well-informed decisions and only apply to lenders that match your credit situation.
2. Not Looking at the Bigger Picture
So many people only opt for the monthly payment model while numerous other options are available. Whereas, when taking out a five- to seven-year loan, you should consider the loan’s cost, the finance charges, and the APR.
Suppose you have a less-than-satisfactory credit situation and seek a loan for a car costing $30,000; your average APR will be approximately 11.3%. With this rate, the interest paid will be slightly over $9100.
In such cases, the monthly payment will be affordable for you; the overall cost, including the APR, will be around $39,000, even if you make timely payments throughout your loan.
3. Taking Longer Loans to Bring Down Monthly Payments
This is similar to the previous situation. A longer loan term does bring down the monthly payments, but only in the short run. In the long run, you end up paying more than you should.
The longer you make your monthly payments, the longer you will keep the loan, and with the combined interest rate, the final value will be far more than the cost of your car.
4. Not Making a Down Payment
Another common mistake when taking out an auto loan is not making a down payment when you can afford to do so.
If you can pay $5,000 as a down payment, the life of your loan will decrease, and you will also save a lot of money. Otherwise, you will spend the same amount on financing charges and interest rates on the extra amount. The best practice is to cut the amount as much as possible through a trade-in or a down payment.
The less money you borrow, the more secondary interest you will have to pay for the privilege of taking out a car loan.
5. Not Checking Your Pre-Approval Status
If you have a good credit report, you can easily check your pre-approval status, aka your pre-qualification, well before you even walk into a car dealership. A pre-approval guarantees that you have money in your hands from a reputable lender, probably with good loan terms.
A pre-approval helps you seek the exact amount you will need. It also means that the financing all dealerships offer must match this loan, or it will have to be better in some way.
A pre-approval is useful for financially savvy customers when purchasing a vehicle.
6. Rushing the Process
Rushing the process means making all the mistakes we have discussed so far. Another common mistake people make when buying a car is falling for the sales pitch at the dealership. The salespeople at car dealerships can be extremely persuasive. They get paid good money to convert as many leads as possible. In the process of doing so, they sell some seemingly attractive financing ideas that aren’t that attractive.
The most common weapon in a dealer’s toolkit is buy-here-pay-here financing. In this financing model, no third-party lender like a bank or a credit union is involved. Moreover, because no one’s watching, the dealer reserves the right to repossess the car if you fail to make timely payments. Furthermore, the interest rates are ridiculously higher than the market interest rates for your credit situation. They may also try to sell faulty vehicles without any history or CARFAX reports. So, take your time, shop around, and don’t rush the process. With patience, you will find a good enough deal that suits your credit situation.
7. Not Considering Pay-Offs for Early Payments
No one likes keeping a loan for a long time, and everyone wants to pay it off as quickly as possible, but there are some downsides.
While making early payments seems attractive, it can have a downside. You are required to make payments at a specific time because the loan helps the lender make interest on your payments.
If you make early payments, it will cost the lender a lot of money, and to compensate for their losses, they will throw some penalties your way. The smart thing to do is to make payments when they are due.
Auto financing is not as complex as some people make it sound. The best thing to do is to have excellent credit standing to be able to find a decent auto loan and to do that, you will have to make timely payments.
The good news is that you can still get a good auto loan, even with an unsatisfactory credit score. Your job is to be smart with your approach, not settle for fraudulent dealerships or the first loan that comes your way.
If you need more information about your credit score and which loans you can qualify for, we are here to help. At Cars R Us, we don’t just sell cars; we also try to solve our customers’ problems. To get in touch with us, visit our website today.