The 5 Biggest Car Financing Mistakes to Avoid
Making the right decisions when financing a car is crucial to ensure you get the best terms and avoid unnecessary financial burdens. Unfortunately, many car buyers fall into common traps that can cost them money and affect their long-term financial well-being.
We look at the top 5 car financing mistakes to avoid, helping you to navigate the car buying process with confidence and make more informed decisions.
Not Checking Your Credit Score
Your credit score is a crucial aspect of your car finance application and is something many car buyers neglect checking before applying for a car loan. It plays a significant role in determining the interest rate and terms of your loan. A higher credit score can lead to better loan offers, while a lower score may result in higher interest rates. Before starting the car financing process, obtain a copy of your credit report, review it for errors, and take steps to improve your credit if necessary. If possible, pay off any other loans, as this will go in your favour when getting car finance.
Focusing Only on the Monthly Payment
Fixating solely on the monthly payment rather than considering the overall cost of the loan is another common faux-pas made by people taking out car finance. While a low monthly payment may seem attractive, it can lead to higher interest charges and a longer loan term, resulting in more money paid over time. Instead, consider the total cost of the loan, including the interest rate, loan term, and any fees. Look for the best combination of a reasonable monthly payment and a shorter loan term to minimise interest costs.
Not Shopping Around for the Best Loan
Another common mistake is not shopping around for the best car loan. Many buyers settle for the first loan offer they receive from the dealership, missing out on potential savings. It’s essential to explore multiple lenders, including banks, credit unions, and online lenders, to compare interest rates, loan terms, and fees. Getting pre-approved for a car loan from different lenders allows you to make an informed decision and potentially negotiate better terms.
Overlooking Hidden Costs and Fees
Car buyers often fail to consider the hidden costs and fees associated with car financing. These can include loan origination fees, prepayment penalties, extended warranties, and add-ons such as gap insurance or vehicle service contracts. Carefully review the loan agreement and ask the lender about any additional costs or fees that may be included. Understanding these expenses upfront helps you make an accurate assessment of the total cost of financing the car.
Ignoring the Resale Value
While the excitement of buying a new car can be overwhelming, it’s important to consider its future resale value. Some car models depreciate at a faster rate than others, meaning they lose value more quickly over time. Ignoring the resale value can result in negative equity if you decide to sell or trade in the car before paying off the loan. Research and choose a car with good resale value to protect your investment and avoid being “upside-down” on your loan.
Bonus Tip: Not Reading the Fine Print
One additional mistake to avoid is not reading the fine print of your loan agreement. It’s essential to carefully review all the terms and conditions, including the interest rate, loan duration, any penalties or fees, and any optional add-ons. Understand the terms of the loan before signing to avoid surprises or unexpected costs down the road.
Sensible Car Finance is a broker service offering advice on the best car finance package for you.