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6 common car loan mistakes that cost you money Part Of Buying a Car In this series Buying a Car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by offering interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct research and compare data without cost, so that you can make financial choices confidently. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this website come from companies that pay us. This compensation may impact how and where products are displayed on this site, including, for example, the order in which they appear in the listing categories and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other products for home loans. This compensation, however, does not influence the information we provide, or the reviews you read on this site. We do not cover the universe of companies or financial offerings that could be open to you. My Ocean Production/Shutterstock

5 min read Published March 02, 2023

Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the ways and pitfalls of taking out loans to purchase a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers feel confident to take control of their finances with concise, well-researched and well-researched content that breaks down complex topics into manageable bites. The Bankrate promise

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At Bankrate we are committed to helping you make smarter financial decisions. While we are committed to strict journalistic integrity ,

This article may include some references to products offered by our partners. Here’s how we earn money . The Bankrate promise

In 1976, Bankrate was founded. Bankrate has a long experience of helping customers make smart financial choices.

We’ve been able to maintain this status for more than 40 years by simplifying the process of financial decision-making

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Bankrate adheres to a strict code of conduct standard of conduct, which means you can be confident that we’re putting your interests first. Our award-winning editors, reporters and editors provide honest and trustworthy content to help you make the right financial decisions. The key principles We appreciate your trust. Our goal is to provide our readers with reliable and honest information, and we have standards for editorial content in place to ensure this happens. Our reporters and editors thoroughly verify the truthfulness of content in order to make sure the information you’re reading is true. We keep a barrier with our advertising partners and the editorial team. Our editorial team does not receive direct compensation through our sponsors. Editorial Independence Bankrate’s team of editors writes for YOU the reader. Our aim is to provide you the most accurate advice to assist you in making smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not affected by advertisements. Our editorial team receives no direct compensation from advertisers, and our content is verified to guarantee its accuracy. So whether you’re reading an article or reviewing you can be sure that you’re getting reliable and dependable information. How we earn money

You have money questions. Bankrate has the answers. Our experts have been helping you manage your finances for more than four decades. We are constantly striving to give our customers the right advice and tools needed to be successful throughout their financial journey. Bankrate follows a strict , so you can trust that our content is honest and precise. Our award-winning editors and reporters provide honest and trustworthy information to assist you in making the right financial decisions. The content we create by our editorial staff is objective, truthful, and not influenced through our sponsors. We’re honest about the ways we’re in a position to provide quality content, competitive rates, and useful tools for you by explaining how we earn money. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the promotion of sponsored goods and services, or by you clicking on specific links on our site. This compensation could impact how, where and when the items appear in listing categories, unless it is prohibited by law for our mortgage or home equity, and other products for home loans. Other elements, such as our own rules for our website and whether or not a product is offered in the area you reside in or is within your own personal credit score may also influence the way and place products are listed on this website. While we strive to provide an array of offers, Bankrate does not include details about each credit or financial product or service. If you’re looking to save money on your next purchase of a car, you’ll require more than just make a great deal with the salesperson on the . A mistake when taking out the money could end up costing you and erase the savings negotiated on the price of the purchase. However, it’s not the time, especially for people with good credit scores. A study by the Federal Reserve showed the fact that 3 percent of prime and super-prime borrowers received auto loans with an APR of 10 percent or more, which is more than double the average rate for their credit scores. Don’t shop around for the best deal in auto loan financing only one error you need to avoid. Here are some other mistakes to avoid if you’re looking to land the best price possible. 1. Not shopping around is an easy and practical way to obtain an auto loan however it isn’t without cost. Dealers usually increase their rates by a couple of percentage points to ensure they make money. Before you visit the dealership look around and visit banks or credit unions. Doing so will provide you with an understanding of the interest rates available for your credit score , and ensure you get the most competitive rate. Remember that banks’ requirements might be more stringent than credit unions’ but they may offer better rates than you’ll get at the dealership. If it’s your first experience buying a car, search for programs that offer financing that are designed for buyers who are first-time buyers. These can be found at credit unions. When you’ve been preapproved for an loan then you can negotiate with the dealership more effectively. In the end, if the dealer doesn’t match the rate you already have, you don’t have to rely on their financing to get the car you’ve always wanted. Key takeaway

The preapproval process will ensure that you get the most competitive rate and gives you the power to bargain.

2. Negotiating the monthly payment rather than the purchase price. Although the monthly installment on your car loan is important and should be have it in advance each month, it shouldn’t be the basis of your . When you’ve made it clear, a month-long car loan amount will inform the seller how much you’re willing to invest. The salesperson could also try to cover up other costs such as an increased interest rate or additional charges. They may also try to sell you with a longer payment timeframe, which can keep that monthly payment within your budget, but could cost you more overall. For this reason, you should negotiate the price of your vehicle’s purchase and each instead of focusing on your monthly payment. The most important thing to remember is

Do not buy a car solely on the monthly installment alone and the dealer may utilize that information to stop negotiations on hold or to upsell you.

3. The dealer should be able to define your creditworthiness. Your creditworthiness is the basis for your interest rate, and a borrower with an excellent credit score is eligible to receive a better car loan rate than one with a low score. Reducing one percent of interest on the $15,000 car loan over 60 months could save hundreds of dollars in interest over the life of the loan. Being aware of your credit rating prior to time will put you in the driver’s seat in terms of negotiation. By knowing your credit score, you’ll know what rate you can be expecting — and also if you are being pushed by the seller overcharge you or deny what you qualify for. What is an unacceptable APR for the car loan? New auto loans had an of 6.07 percentage in the 4th quarter 2022 according to data from . Credit scores of people with good credit qualify for rates around 3.84 percent, while those who had bad credit had an average new vehicle rate that was 12.93 percent. Used car rates were higher than 10.26 percent for all credit scores. And the was a sky-high 20.62 percent. So, a “bad” APR for a vehicle would be on the upper end of these figures. The law states that loans cannot have an interest rate that is greater than 36 percent. Seek a lender that will offer you an average rate for your credit score or better. The most important thing to remember is

Check out a variety of lenders to determine the estimated interest rates. You can do whatever you can to boost your credit score before heading to the dealership.

4. Do not choose the correct term length range from 24 to 84 months. Longer terms may offer tempting low cost of payments. But the , the more the interest you’ll have to pay. Certain lenders will also charge a higher interest rate if you opt for an extended repayment term because there’s a greater risk you’ll end up upside-down on the loan. To determine which is the best option for you, think about your needs and priorities. For example, if you’re the kind of person who wants to get behind the wheel of a new vehicle every few months, being trapped in the long-term loan might not be right for you. On the other hand If you’re on a limited budget, a longer term might be the only option to afford your car. Make use of a tool to analyze the cost of your monthly payments and choose which option is best for you. What you should take away from this

A short-term loan will cost less interest in the long run but it will also have higher monthly payments. A longer-term loan will come with lower monthly payments , but will have higher rates of interest over time.

5. Finance the cost of add-ons Dealerships profit from — particularly aftermarket products offered through Finance and Insurance department. If you want an or gap insurance, these options are offered at a lower price from sources outside the dealership. Wrapping these add-ons into your financing will also cost you more in the end because you’ll have to pay interest on them. Question every fee that you don’t know about to avoid unnecessary additions to your purchase price. If you find an additional item you truly want, pay for it out-of-pocket. Better yet, check if it’s available outside the dealership at a lower cost. Buying from a third party is often cheaper for products that are aftermarket including extended warranties . The most important thing to remember is

In the long term adding financing options will increase the amount of interest you pay in the end. Prepare yourself for negotiations by knowing which add-ons you truly need and which are cheaper in other places.

6. The process of rolling forward negative equity ” ” on the car loan is the situation where you have more debt on your car than what it’s worth. Some lenders will allow you to carry 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 and previous vehicle. If you were upside-down on your last trade-in, chances are you will be in the same position again. Instead of rolling negative equity into the new loan first, consider taking out the new one. It is also possible to pay off your negative equity upfront to the dealer in order to save yourself from paying excessive interest. Key takeaway

Do not roll any negative equity in your car forward. Instead, pay off as much of your old loan as possible or take the amount that is left when you trade in your car.

The main thing to success when applying for a car loan is preparedness. It is about negotiating your monthly payment and knowing your credit score, selecting the correct term length, being aware of add-on costs and avoiding carrying across negative equity. Be aware of any mistakes that could occur when you negotiate, and with luck, you will leave with a savings and time. Find out more


The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the details of taking out loans to purchase an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers get the confidence to take charge of their finances by providing well-researched, clear facts that break down otherwise complicated topics into digestible pieces.

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