Next to buying a home, buying a car is one of the biggest financial decisions you’ll make in your life, and you’ll likely do it more than once. And when it comes down to how to buy a car, making a car payment, or even asking yourself “How am I going to pay my car loan?” there are so many options — new vs. used vs. certified pre-owned, dealership vs. independent seller, base model vs. higher-end options — it’s no wonder the world of cards and credit can be mind-boggling. When buying a car, financial options can get confusing. Luckily, the experts at Credit.com have some car buying tips to help you navigate your way around picking the right car, getting the best loan you can and negotiating your way to some savings. From dealer scams to credit traps, these five car buying mistakes could cost you thousands.
1. Starting to Shop Before You Know Your Credit Standing
One of the biggest car buying mistakes you can make before you even step foot on a lot is not checking your credit. Your credit scores will impact whether you can get approved for a car loan at all and the rates and terms banks, credit unions and dealership financing units will be able to offer you. To be sure that you are getting the best rate on your car purchase, take a look at your credit scores (you can see two of your credit scores for free on Credit.com) before you start shopping. If you have some time before you need to pull the trigger and buy a car, you can do a little work to fix your credit, getting you a better rate on the loan.
If you have no credit, getting a car loan is a bit trickier, but not impossible. Car loan rates are very low right now, with many dealerships running 0% offers on new models. And car loans generally have looser credit standards than credit cards because the dealer or bank knows they can always repossess the car to get their money back if you stop paying them. This means that people with no credit can still get a car, but they’ll be paying a higher interest rate, may be required to put up a larger down payment and they may also need a cosigner with decent credit to secure financing.
2. Not Researching Online
Thanks to the Internet, car buyers have a ton of information available to them these days. Websites like Kelley Blue Book, Cars.com and Edmunds all offer free information about car models, features, prices and you can even find owner ratings, car suggestions and reviews. Before you take your first test drive, you should compare cars in your price range, decide which car is right for you, and what price is fair to pay.
Once you have selected a car to purchase, be sure to get the VIN number and look up the vehicle’s history report online. It is important to check a car’s history even if it’s new. A lot can happen to a new car on the way from the factory. There have been cases of unscrupulous dealers trying to pass off vandalized or damaged cars as brand new. Plus, brand new cars damaged in floods or hurricanes often end up on the market. Avoid bad deals and lemons by doing your research online.
3. Thinking in Monthly Payments Instead of Price
A standard car dealer trick is to talk to you about a car’s cost in terms of what you are willing to pay each month instead of the actual price. This can be confusing and is often misleading because the salesperson will use the longest auto loan term available (72+ months) to calculate your possible rates. That extended loan term may seem affordable and budget-friendly when you look at just the monthly payment, but taking on a longer loan term means you’re upside down on the loan for longer, limiting your options for trading it in. A $25,000 car with a five-year loan has the same monthly payment as a $16,000 car with a three-year loan. The difference? You’ll end up paying $2,500 more in interest for the more expensive car. Go into the dealership knowing the total amount you can spend and stay below that number. (Getting pre-approved for a car loan in advance will help you stay within your budget as well.)
4. Buying Add-Ons From the Dealer
Add-ons are optional features that a dealer adds to a car. Common add-ons include undercoating, CD Stereo, alarm system, window tinting, chrome wheels, pin-striping and leather seats. These features are often overpriced and used as a way to boost the sale price of the car. Plus, it’s been shown that add-ons rarely add long-term value to your car. In some situations, such as an upgrade to a premium model, these add-ons can actually harm the resale value of a car. If you do decide that you need an add-on, check first with outside companies that may offer the service for less.
5. Not Shopping Around for Car Financing
If you don’t know how car financing works, you may think your only option is getting a loan at the dealership. Dealership financing offices usually offer auto loan rates that are several points higher than what you could receive from an online auto lender, bank or credit union. These rates are largely based on your credit score, as well. As part of the car buying process, you should shop and compare auto loan rates from various sources. Reducing your loan from an 8% interest rate to 4% could save you a bundle on the car of your dreams.
What about getting a personal loan to finance your vehicle? In many cases, the interest rate you can get on an auto loan will be lower than what you can get on a personal loan. That’s because the auto loan is a secured loan (the vehicle is collateral) whereas the personal loan is unsecured.
However, dealership financing can be the best deal in some specific situations. For example, if you qualify for a special 0% offer, or if you have bad credit and can’t get a loan from an outside lender, dealership financing may be your best choice.
Get pre-approved for an auto loan before you start shopping for a vehicle. That way you’ll know the interest rate and amount you are qualified to buy. Plus, it gives you additional negotiating leverage because you’ve already lined up financing.
Kali Geldis contributed to this story.