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Ignore all the silly ads you see on TV that make it seem like you can just waltz into a car dealership, choose the car of your dreams, and get the right car financing deal all at the same time.
If you follow that scenario, you’ll be falling into every single car financing mistake in the book.
The truth is, you probably won’t be paying for your car in full or in cash. More than likely, you’ll be signing up for a form of car financing. After all, the U.S. has seen a national auto loan debt that reached $1.37 trillion.
If this is your first foray into the world of auto financing, no worries. You’ve come to the right place. Keep on reading to learn all about the main five car financing mistakes you’ll need to avoid.
1. The King of Car Financing Mistakes: Not Knowing Your Credit Score
You can consider this the crowning jewel of car financing mistakes. It’s so easy to fix. Yet, a lot of people go into car financing blind, without even knowing the basics of their financial situation.
In the simplest of terms, you must know your credit score rating before you even think about contacting a car salesperson or walking into a car dealership.
Even if you’re in the opposite position of owning a car, and you’re thinking about exploring title loans as a financing option, you’ll still want to know your credit score rating.
If you’d rather save up money and not pay more than you need to on interest rates, then you’ll need to have your credit score on a hand. This will take away any dealer’s ability to swindle you into taking a loan with a high interest rate.
2. Car Shopping Without Preapproved Financing
Similar to the protection benefits that knowing your credit score can give to you, you’ll also want to get a preapproved offer for car financing before you start shopping for a car in earnest.
Here’s the deal. The moment you step a toe into a dealer’s office, know that the negotiations have already started, and they will try everything to get the best financing terms for their dealership, which equals the worst financing terms for your own wallet.
By having a preapproved deal in your hand before starting your negotiations, you’re declaring that you’re not desperate for other financing offers. You’re in the powerful position of only having to accept financing offers that have better terms, not the other way around.
There will be no pressuring you into accepting the first offer that comes your way.
This is your way of unbundling the deal. You’ll find that the majority of car dealerships would prefer having your car financing dealt with in-house. Sure, it sounds convenient to you, the buyer, at the first glance.
However, the truth is quite the opposite.
It’s similar to taking away one of the advantages that this car dealership might have, a potential cash cow for the place. You’ll be better off picking a financial institution to get you a financing deal, instead of a business that focuses on selling you a car.
A financial institution will care about your ability to repay the loan, instead of looking for ways to have you buy a car, regardless of the potential financial strain that it might place you under.
3. Ignoring the Term of the Loan
Or rather, not paying sufficient attention to the term of your loan. This is also known as the length of your loan, and it can truly make or break your deal. Simply put, the longer the length of the loan, the more interest you’ll be paying in total.
Sure, when you extend the length of your loan, you get monthly payments that are on the lower end of the spectrum. However, you need to keep in mind that the longer your term is, the higher your chances of getting stuck in an upside-down car loan. Once you’re stuck in an upside-down loan, you need to get out as soon as humanly possible.
It’s the situation where the money you owe on your car is actually higher than the current market value of your vehicle. It’s an all-time loss.
4. Being a Monthly Payment Buyer
This is the other side of the coin to the loan term issue we’ve just discussed. Yet, it’s such a deadly mistake that tends to go unnoticed by a lot of people, so let’s examine it from the other side of the equation.
Once you’ve picked a loan term that’s a minimum of 36 months and a maximum of 60 months, you’ll want to look at your monthly interests and make the decision on whether you can afford those monthly payments or not.
A car salesperson will immediately try shifting the focus to smaller monthly payments. Regardless of how tempting it can be to have tiny monthly payments. You need to keep in mind that the longer your loan term, the higher the dealership’s or lender’s profits.
The basic rule of value when it comes to money is time. Traditionally, future money will be worth less than your present money. Therefore, if the dealership can have you spending more money in the future than right now, they’re the ones who are benefiting. Not you.
5. Disregarding Early Payoff Penalties
If you’re unaware of the existence of early payoff penalties, we’re glad that you made it to this article. You would think that a dealership would rejoice in getting their money in full earlier than planned.
Yet, they’d actually prefer to elongate the loan terms as much as possible. When you decide to pay off your debt early, you’re robbing them of additional revenue.
So, you’ll want to ask about whether your car loan has early payoff penalties or not. You’re better off with getting a loan that doesn’t have this clause.
Ready to Apply Your Car Financing Strategy?
We know that it can be rather overwhelming to take your first steps into the world of car financing.
Hopefully, our article has shed some light on the key five car financing mistakes that anyone might fall into.
If you liked our guide, then you must check out the rest of the tips and strategies in our finance section. After all, your money won’t grow on its own. You have to be proactive when it comes to building your wealth.