Taking a loan out to purchase a car is a big financial decision. It can affect your budget long-term. Choosing a loan package and vehicle are decisions you want to make with confidence. Read on to learn about potential pitfalls to be sure you find a trustworthy lender and the best car loans.
Spot Predatory Lending
If you don’t have the best credit, do not fall victim to a loan with an unreasonably high interest rate or long loan term. Yes, you might really need a vehicle to get to work or for your children, but a car is not worth sacrificing your financial wellbeing. An article from Jalopnik describes a situation in which a borrower with a low credit score agreed to purchase a used truck for $21,000 with a service agreement that cost an additional $2,500. This borrower put $4,000 down on the purchase, but at a sky-high interest rate of 25%, he ended up paying $45,000 over six years of monthly payments – more than the cost of a comparable new vehicle with zero mileage. With high interest rates and lengthy loan terms on used vehicles, borrowers are lucky if they can repay their loans before they need to replace their cars.
Avoid Negotiating a Bundle
Dealerships which offer financing and insurance usually try to negotiate everything (purchase price, loan terms and fees) into a single package, which makes it unclear and confusing how much you are actually spending. A dealer will knock off a chunk of the vehicle’s price and then charge it back in extra fees or with a high interest rate. Negotiate everything separately and read the fine print to make sure you are not being charged unnecessary junk fees, which according to the Center for Responsible Lending include items like theft deterrents, rust proofing, gap insurance and service contracts. Added up, these fees will more than make up for a reduced sticker price.
Not Knowing Your Credit Rating
Credit scores range from 300 to 850 and are based on a myriad of different factors in your credit history. Although in 2017 the average score hit a record high of 700, 37% of Americans’ scores fall below 670. Knowing your score will help you determine the type of interest rate for which you could qualify (the higher the credit score, the lower the rate). If you have poor credit, take steps to improve it before applying for a loan: bring accounts current and pay off collections.
Not Securing Financing Before Visiting the Dealer
Apply for a loan with a trustworthy lender prior to visiting your car dealership. Having financing in hand will give you more power to negotiate and prevent you from exceeding your budget. Better yet, if you’re ready for a new car, your Credit Union is ready with pre-approved loans at new, low rates! The world has changed, but our members still need to get to work, so we’ve cut our auto loan rates (including refis) across the board.
This article was developed in partnership with FI Grow Solutions.
