Taking a loan out to purchase a car is a big financial decision and will affect your budget for a long time. According to Experian, 85% of new passenger vehicles are financed. Choosing a loan and vehicle that fit your needs 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, don’t 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 well-being.
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.
Use this calculator to determine your monthly car payment and see if you can fit it into your budget.
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. For example, 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 aren’t being charged fees that aren’t beneficial to your loan. According to the Center for Responsible Lending, this can include items like theft deterrents, rust proofing, and service contracts. Added up, these fees will more than make up for a reduced sticker price.
However, sometimes fees like Mechanical Breakdown Protection (MBP) and Guaranteed Asset Protection (GAP) are a great addition to your loan. Just be sure to do your research, talk to your lending officer, and speak up when you want to know more.
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.
In light of COVID-19, consumers can now obtain free weekly credit reports from each of the three major credit bureaus at annualcreditreport.com. 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 and obtain a pre-approval from a trustworthy lender prior to visiting a car dealership. Having financing in hand will give you more power to negotiate and prevent you from exceeding your budget.
Buying a car can be a daunting experience. Use these tips to educate yourself before visiting a dealership. At A+FCU, your lending team is always available to help you through the process of shopping, financing, and purchasing a vehicle. Easily apply for your pre-approval online and reach out to us if you have any questions.APPLY TODAY