Auto Loan Disasters
The Top 10 Mistakes Customers Make When Buying a Car.
You would probably laugh at me if I told you that the most detrimental mistake people make when buying cars is not paying for them in cash!
Realistically, the average person doesn’t have $15,000 in savings to pay for a car and drive it straight off the lot. Most of us need to get a car loan! Remember, just because you suddenly have $15,000 at your disposal doesn’t mean you can afford to become sloppy with your payments. When you’re paying back a loan, any sloppiness can negatively impact your credit score making it hard for you to get a loan or credit card in the future. A late payment or default on just one monthly car payment can also cause lenders to revoke trust – which means they might hike up those interest rates or make you pay for your mistake in hefty late penalties.
As a responsible car buyer who wants the best deal, it’s up to you to do your research as far as the best lenders, most flexible loans and lowest interest rates are concerned. You also have to do your research where price is concerned. Know the value of the car you want to buy. You can find out easily by visiting the manufacturer’s site. I know it sounds cliché, but don’t trust the car salesperson to admit they know about deals and incentives and honor them. It is up to you to print or take a copy of any advertisement, displaying the price of the vehicle you want and all of the features included into the dealership with you. This is the only way you will get a car dealer to honor a so-called “deal”.
Knowledge is the key in getting the best deal on an auto loan. That’s why we’ve put together a list of the 10 most common mistakes when it comes to car loans and purchasing a car. Watch out for these common mistakes that cause us to harm our credit ratings or lose our cars altogether:
- You’re too lazy to do the research on lenders and car loans – No we don’t have a list of scam-artist lenders looking to take your money away. Why? Because there are simply too many of them. Instead we put the responsibility on you. It is up to you to decide what type of lender is the best for your car loan – is it your bank, a credit union, an online lender with connections to thousands of financial institutions, or a lender that specializes in lending to those with poor credit, bankruptcy or repossessions? As you can tell your borrowing options are plenty, so shop around for the best interest rates, loan terms (length) and repayment option that you can find. The worst thing you can do when applying for a car loan is be lazy. Refusing to do thorough research will leave you with less than desirable annual percentage rates (APR) on your loan.
- You’ve borrowed beyond your budget – We know that it’s easy to get tempted by the sexy curves on a hot red sports car, but that doesn’t give you the excuse to borrow for a $50,000 car when you can only afford a $13,000 car. We’re all adults, and that means we have to face facts when it comes to the cars we dream about and the cars we can actually afford. The biggest financial disaster that you can cause for yourself is borrowing money that you can’t pay back. Have a maximum spending price and maximum monthly payment price firmly in mind when you go to the dealership – and stick to it! Otherwise you may blow your chances when it comes to future loans and credit.
- You’ve missed a payment or two – I should smack your hand, but I really don’t have to because if you’ve missed car payments you already know what happens. Not only did you struggle to catch up and probably get further behind on your car payments, you probably hurt your credit rating beyond repair. You might have even missed so many payments that your lender repossessed your car. When you take out a car loan, make sure you know when your car payments are due – most come automatically out of your savings account, so make sure you have enough in your account to cover the payment. If you have too many payments coming out at the beginning of the month, it is possible to have payments withdrawn mid-month. Just talk to your lender – they are happy to help you make payments.
- You have no idea what you’re trade-in worth is - If you were going to sell your car online or put a for sale sign on it and park it on the front of you lawn, you’d be sure to do a lot of research to make sure you’re getting your money’s worth right? Well then why would you go to the dealership and expect them to give you a good trade in value without doing any research? Go to your mechanic to get your car appraised, or go online and look at what comparable models from the same year are selling for. Now that doesn’t mean you should be unrealistic about the worth of your car. You can also visit NadaGuides.com for a realistic and current selling price on your car. You can bet the dealer will try to take your trade-in for thousands of dollars beneath its fair market value. You can also make sure to get what your car is worth if you take time to cover up the rust, wash it and clean up the trash and other junk on the floors and seats before going to get it appraised. Our basic rule is that you should treat a trade-in as you would if you were selling your car to a private buyer.
- Talk trade-in before you nail down the price of the new car – Always negotiate the price of the new car with the dealer before you ask how you’re your car is worth in trade-in value towards the price. If a dealer knows that you have a trade in, they will spike up the price of the new car so they’re giving you almost nothing for it. So NEVER tell them you have a trade it until after you agree on a final price for the new car you want to buy.
- You didn’t compare interest rates – Interest rates between dealers are not all the same. You will come across dealers that offer as low as 9% interest rates; while others are offering 12%. If you pay $10,000 for a car at that 12% interest rate, you will be paying $3,250 in interest over 5 years. At 9% the interest over the 5 year lease term would be only $1000. I don’t know about you, but I could think of a lot of things to do with $2,250. My point – shop around for the best interest rate and save yourself some money.
- Never wear your emotions on your sleeve – Car dealers would make excellent social workers because they are experts when it comes to reading your emotions. Unlike a social worker however, the dealer is looking to make a sale. They are hoping that you like the car so much that you will pay anything for it. You might think the salesperson has your best interest at heart when they tell you that this car is more expensive because it has dual air bags, traction control and leather interior, but really they are just looking to push your emotional buttons to help them make the sale.
- You put zero down – Zero money down on a car is not always a good thing. If you don’t put a down payment on the new car you’re about to purchase, it will make your loan very expensive. If you save enough to put a large down payment on the car, you will bring your monthly payments down considerably and likely snag better interest payments on your car loan. A large down payment tells the lender you are serious about paying the loan back as quickly as possible – and therefore a responsible borrower.
- You were suckered in by the low monthly payments – When you buy a car there are 2 things to keep in mind – the monthly payment amount and the total price of the car. Most people just hear the monthly payment amount and if it’s something they can afford they sign on the dotted line. However they’ve forgotten about the total price of the car. Any dealer can get your monthly payments down to $300 per month if they stretch out the lease term (length of the loan). Be cautious when you tell the dealer that you can only afford $300 per month, but you want that shiny new corvette. Believe me the dealer can get the payments on that corvette down to $300 a month – if they stretch the lease out to the next 20 years! Before you go to the dealer decide on a maximum sticker price and monthly payment using an online car payment calculator like this one on BankRate.com.
- You got suckered in by all the “extras” - Dealers call the money they make after the ticket price the “back end”. This can be anything to jack up the final price of the car – from financing to extended warranties. Keep in mind that you don’t need to purchase warranties from the dealership, you can do so from a garage. You can also tell the dealer that your maximum price should include warranties, etc. or no deal!
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