Every credible new car-buying primer will advise you to seek pre-qualification for a car loan before you begin the shopping process. However, there are some things you should know about that process before engaging in it as well. There are absolutely some things to avoid when shopping for a car loan.
Let’s take a look at the most common ones.
Underestimating the Importance of Your Credit History
Your first move when considering applying for any sort of credit should be to review your credit report and learn your FICO score. Developed by the Fair Isaac Corporation, your FICO score is an indicator of your perceived creditworthiness, based upon factors reflected in your credit history.
In turn, your credit score will determine the interest rate for which you should qualify. The higher your score, the lower the perceived risk you represent, so borrowing should be less expensive for you.
Similarly, errors in your credit report can drag your score down. Reviewing it on an annual basis gives you the ability to ensure your history is as accurate as possible.
Overlooking the Type of Loan
Auto loans generally to fall into two categories: simple interest and pre-calculated. A pre-calculated loan requires payment of the full amount of interest the loan is expected to earn — even if you pay it off before the term of the loan runs its full course.
A simple-interest loan requires you to only pay the amount of interest that accrues while the loan is outstanding. In other words, there’s no pre-payment penalty if you repay a simple-interest auto loan early. You’ll only pay for the time you had the lender’s money working on your behalf. The charges stop when you give the money back.
Accepting a Longer Term to Make a Payment Affordable
You’re looking at an unaffordable car if you need to extend its financing beyond five years to make the monthly payment fit into your budget. Yes, there are 72- and 84-month loans available these days, but they are to be avoided.
Most new-car warranties run three years or 36,000 miles, whichever comes first. With a 60-month loan, you’ll only make two years of payments after the warranty expires. With a 72- or an 84-month loan, you’ll be making payments long after the warranty has expired — and that’s when the need for more costly services and potentially expensive repairs can rear its head.
Further, extending the loan term that far into the future almost guarantees you’ll wind up owing more for the car than its market value. This can be a real problem when you decide you’re tired of the car and want to get another one — or if the car is totaled. You’ll still have to pay off the loan before you can do anything else.
Accepting the First Loan You’re Offered
In most cases, shoppers just go with dealer financing because it’s the easiest route to take. You can do everything right there at the dealership. This is usually the first and only loan offer many people consider.
This can be one of the most expensive ways to finance a car.
Dealership financing comes with a degree of profit folded in for the dealer. Seeking your own financing means you’ll deal directly with the source, so you’ll typically see better rates. Of course, the only way to know if you got a good deal is to shop around and see what other lenders will offer based upon your credit score, credit history and the amount of the down payment you can make. Always get pre-qualified with a lender like RoadLoans before shopping for a new car.
These four things to avoid when shopping for a car loan will help you get a better deal on your new car. It will also help you keep more of your hard-earned money.