10 Common Mistakes to Avoid When Getting an Auto Loan

Multiple cars in a parking lot

Unless you're living in a thriving metropolis with excellent public transportation options at your doorstep, you probably need a way to get around. Bikes are environmentally friendly and involve cool, colorful helmets and stuff, but you might need something more reliable and convenient, like a car.

Currently, there are over 270 million legally registered vehicles on the road today in America. Just over 90% of all American households have at least one operative vehicle. In many cases, every adult in the house has their own vehicle.

Roughly 80% of the vehicles mentioned above were purchased with some type of auto loan. Auto loans can be a great thing, if you are careful about it. The right car loan can have you rolling off the lot in a shiny new set of wheels, with low monthly payments and a reasonable APR. However, the wrong loan can mean payments you can't keep up with, a sky high APR. and long loan terms resulting in a possible death spiral for your credit score.

Shopping for a new or used vehicle is confusing enough as it is. There are so many options out there to choose from. And once you've decided which vehicle is the right one for you, finding the best auto loan available to fit your budget and financial situation is key. Finding the most optimal auto loans takes a little bit of research and dedication, but it will be well worth the effort in the long run.

In this piece we are taking a look at some of the most common mistakes consumers make when shopping for an auto loan. Hopefully, reading about these will help you make financially savvy decisions when applying for your next auto loan.

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10 Common Mistakes to Avoid When Getting an Auto Loan

1. Not Considering All Your Options

Once a consumer decides on the vehicle they want, it can be tough to apply the brakes and make measured, careful decisions about financing. Salesmen know this, which is why they get the car into your hands as soon as possible. Once you've driven the car of your dreams, it is easy to have your judgment clouded by a haze of new car smell and soft leather interiors.

The salesman will then sit you in a little room and give you their financing terms. Many people make the mistake of agreeing, because it is easy, convenient, and oftentimes filled with terms and conditions they do not fully understand.

As the consumer, you have many options at your fingertips when it comes to buying a car if you do your research. There are multiple lenders, online lenders as well as banks and credit unions out there who want your business. Make certain to shop around to see if you can find the best loan terms possible before signing anything offered at the dealership.

2. Not Knowing Your Credit Score or Having a Clear Grasp of Your Financial Health

Knowing your credit score and having a clear idea of your actual financial standings, and a good conjecture of your future financial health can help you make smart decisions about what you can comfortably afford when taking on a car loan. If you have good credit, you can expect to be offered favorable terms on your auto loan.

If you have a mountain of existing debt, or are in the process of rebuilding your credit file, you have options. It is important to know where you fall on the credit spectrum, so you can manage your expectations and only apply to lenders who might approve you.

Read more on the topic of Bad Credit Auto Loans here.

3. Only Considering the Monthly Payment, and Not the Big Picture Actual Cost of the Loan

Many make the mistake of solely focusing on the monthly payment, and whether or not they can handle it, at the moment. When taking on a loan that will probably span between 5 to 7 years, you should be thinking about the entire cost of the loan, including what you'll pay in finance charges and APR.

Basically, people make the mistake of not seeing the forest through the trees, as the saying goes. For example, if you have so-so credit, (between 501-600) and you take out a 5-year auto loan for a $30,000 car, your average APR will probably be around 11.3%. At this rate, the interest paid over time on this loan is $9,163.30.

So while your proposed monthly payment might be something you can handle, the actual amount you will be paying for your $30,000 car is $39,163.30. This is assuming you pay on time, every single month, for the life of the loan.

Read more on the topic of Average Auto Loan Rates here.

4. Taking Out a Longer Loan Than You Need, To Bring Down the Monthly Payment

Same reasons as #3, but it is worth mentioning on its own, as many people make this mistake. A lower monthly payment is a short term solution for a long term problem, which will only end up costing you more in the long run.

The longer you make the payments, the longer you have the loan. The longer the life of the loan, the more you end up paying in the end.

5. Not Making a Down Payment, If You Can

Financing the full amount of the car, without taking as much off the top as you can at the start of the transaction is a very common mistake. Financing more than you need means paying interest on more than you need to, for a longer period of time. If you can take 5K off the price of the car comfortably, then you will be saving the interest and finance charges on that extra amount.

It is important to always try to knock as much off the financed amount as possible, either with a trade in or a down payment, or both. The less you borrow, the less you are charged in interest for the privilege of taking out the auto loan.

6. Shopping Without Checking Your Pre-Approval Status

If you have good credit, you have the option of checking your pre-approval status, also called pre-qualification, before you walk into a dealership. This means you have a guaranteed amount to use, from a reputable lender, probably with excellent loan terms, before you walk in the door.

Pre-approval for an advantageous auto loan arms you with the exact amount you can comfortably afford, and it means that any financing offered at the dealership or car lot will have to match or beat that existing offer. It is a helpful tool for financially savvy consumers to use to their advantage while shopping for cars.

7. Rushing the Process

One of the biggest mistakes that consumers make is rushing the entire car-buying process. Rushing means you might make all of the mistakes in this article. Not shopping around, not exploring all your options, taking the first loan offer, not knowing your actual financial standing are all issues connected with rushing the process.

Allowing the salesman to rush you is included in this as well. Remember, it is their job to sell you this car, no matter what. If you feel like it is all happening too fast, that is because it is happening too fast. Take a breath, step back and look at the situation critically, before you sign anything. Read through every single thing. Make sure they are not rolling unnecessary warranties or add-ons into the pricing of your vehicle. Ask questions. As many as you need to feel comfortable and knowledgeable about the decision you are making.

There is less urgency in car buying these days, thanks to the convenience and ease of ride sharing apps. So don't rush into any decision about a car. You can Lyft your way to work for a few more days, while you get multiple quotes and find the best possible loan to match your financial needs.

8. Not Accounting for Future Financial Changes in Your Life

You should always be thinking about whether your financial situation will stay as it is, or possibly fluctuate with changing job markets and inflation when considering an auto loan.

Before getting into a 5 year auto loan, it is important to consider whether or not you will be moving or starting a family in the 5 year range of the auto loan, as these life changes cost money, and your monthly budget will certainly be upended.

9. Not Considering Early Pay-Off Penalties Which May Apply to Your Auto Loan

When taking out an auto loan, it is important to read all the fine print before signing anything. Some lenders will require you to pay a penalty if you pay your loan off early. Lenders make money on the interest you will pay for the life of your loan. So if you agreed to pay interest for 6 years, and you pay your loan off in 4, that lender will only get paid interest for that 4 years. Since they are in business to make money, many will make certain there is a prepayment penalty to recoup their costs.

Luckily, not all lenders do this. So again, make certain to shop around for the best loan you can find. Do your research and don't rush.

10. Not Attempting to Refinance a Bad Loan, If You Made Any of the Mistakes Listed Above

So, just in case you didn't see this article before you got yourself in a horrible auto loan, we wanted to include #10. Refinancing a bad auto loan is an option, if you've made payments on your loan on time, every month, for at least 3 months. You are more likely to get favorable terms and a lower interest rate if you refinance after a year of solid on-time payments on your current loan.

Remember our example above in #3? You've financed $30,000 with an APR of 11.03%, meaning you will be paying $9,163.30 in interest. If you refinance that loan amount to a more favorable APR of 6.61%, the amount you'll pay in interest goes down to $5,311.88.

Saving that amount of money over the life of the car loan is definitely worth the research and time it takes to refinance and find a better loan.

Read more about the 7 Best Auto Loans in the industry here.

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FAQ

What does no penalty for early pay-off mean?

This means that there is no penalty if you happen to be able to pay off your loan early. This is a good thing, as paying your loan off early means paying less interest over the life of the loan.

Can I refinance my auto loan?

In many cases, yes. Refinancing can help you save money or arrange for lower monthly payments, depending on the lender.

Can you get out of an auto loan?

Getting out of an auto loan is not easy, but it is possible. For more on this topic, read our article about How to Get Out of a Car Loan here.

What are some good auto loan companies?

There are a lot of good lenders to choose from, depending on your credit score. Shopping around online and with your own bank is a good place to start. Read more about the Best Auto Loans here.

Can you negotiate auto loan rates?

You may have an option to discuss your rate with a lender, but your best bet is to shop around and hopefully get pre-approved for a loan before you walk into a dealership. Once you’ve received a pre-approval, you can take that to other lenders, and the dealers, and compare the rates you are offered.

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