Credit.com’s experts show you how to avoid the five most common car buying mistakes. From dealer scams to credit traps, these mistakes could cost you thousands. To be sure that you are getting the best rate on your car purchase, be sure to take a look at your credit score for free using Credit.com’s Credit Report Card. You can also get your credit report for free each year from all three credit reporting bureaus.
[Offer: If you were denied an auto loan it may be due to a low credit score. Firms like Lexington Law can help you manage the credit repair process. Learn more about them here or call them at (800) 594-7441 for a free consultation.]
1. Buying New Instead of Used
New cars lose anywhere from $3,000 to 5,000 in value the second you drive them off the dealer’s lot. If you are financing your car with an auto loan and have little or no downpayment, this depreciation means that you are instantly “upside down” on your loan (your loan amount is more than the car is worth). New car scent is appealing, but is it really worth thousands of dollars? Instead, research slightly used models. The same model of car that is just one year older can be dramatically less expensive and can still come with the same warranties as the newest model. With all the money you’ll save by buying used, you can afford a lifetime supply of new car scent air fresheners.
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 with a company like Carfax. 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 (60+ months) to calculate your possible rates. 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 preapproved 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 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. Financing With a Dealership
Dealership financing offices usually offer auto loan rates that are several points higher than what you could receive from an online auto lender 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 8% 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 preapproved 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. It gives you additional negotiating leverage because you’ve already lined up financing.