Shopping for a car loan can be a financially and mentally draining experience. More than 86% of car buyers used at least some amount of financing to purchase cars in the beginning of 2016, according to the latest data from Experian.
Unfortunately, many car buyers make crucial, yet preventable, mistakes when they take out a loan for a new car. The MagnifyMoney research team decided to find out just where shoppers are going wrong. We asked more than 600 car owners a series of questions about how they shopped for a car loan.
The answers we received were pretty troubling, to put it mildly. Read on to see where buyers are going wrong:
1. Too many people let their car dealer do the homework for them.
Nearly two-thirds of the drivers we surveyed committed the ultimate auto financing mistake: they let the dealer find their loan.
When you let the dealer decide find the loan for you, you have no way to gauge whether what’s presented to you is in fact the absolute best offer you can get. You also forfeit pretty much all of your negotiating power right off the bat. Only about one-third of the borrowers we surveyed shopped online for a loan with a lower interest rate before walking onto the dealer’s lot. Spend some time on comparison websites, auto loan services, online lenders, and personal loan companies to find the offer that best suits you.
“Many otherwise-savvy consumers feel intimidated by the car buying experience and react by letting the dealership take control of the deal,” says Thomas Nitzsche, a credit educator at Clearpoint Credit Counseling. “Some consumers also feel their credit is barely good enough to secure an auto loan, so take whatever they are offered or buy into the dealers telling them that they are doing them a favor.”
Tips on pre-shopping for an auto loan:
Empower yourself by shopping for auto loans before you head to the dealership. When you walk into a dealership with a pre-approved auto loan rate from a bank or credit union, you can use that as leverage. Your dealer will be more inclined to match that rate or find you a better deal, explains Matt DeLorenzo, a managing editor at Kelley Blue Book.
“With the resources available on the internet, from financing to determining what your trade-in is worth, there’s no excuse for walking into a dealership not knowing the prevailing interest rates, what sorts of incentives are out there, and what sort of pricing and what others are paying,” he says.
Have your credit score in hand to ensure your credit info is accurate. A dealer can easily say that you don’t qualify for a better rate without having run a proper credit check. You can check your credit score on a number of sites for free.
Don’t shop at the last minute. We can’t predict things like car accidents, but there are steps you can take to be sure you won’t get caught in a desperate car buying situation. Dealers will smell that desperation from a mile away and take full advantage of it. If your car is showing signs of needing repairs, take care of them right away. If you’re in a pinch, think about renting a car temporarily, taking public transit or carpooling until you’ve had time to get your ducks in a row.
2. More than half of car buyers never had their income verified.
Car dealers should verify your income when they take your loan application. But that doesn’t mean they always do. More than 52% of our survey respondents said their income wasn’t verified. When irresponsible dealers don’t verify your income, they could potentially give you a loan that you can’t actually afford. Some dealers skip this step in order to speed up the application process and increase your chances of getting approved for a loan.
To get a sense of what you can reasonably afford to buy, use a free tool like this cost calculator from Edmunds. It allows you to take into account not just your income but also the value of any car you are trading in, how much you can afford to put down on your new car, and any balances on existing car loans. If you go into a dealership knowing what you can afford, they will be less likely to sell you something you know is outside of your budget.
3. Most people agreed to a longer-term loan to make their payments more affordable.
A whopping 82.6% of drivers we surveyed said they took out a loan with a term longer than 5 years to lower their monthly payment. This may seem like a great way to save on your monthly payments. But you will wind up paying more in the long run, thanks to interest. Auto loans with longer terms usually carry a higher interest rate. Not surprisingly, nearly one in five car buyers told us they signed up for a long-term auto loan because it was the dealer’s idea.
“The dealer is going to suggest the longest term possible, because it means selling a more expensive car—and likely [earning] a higher commission,” explains Nitzsche. Because dealers want you to focus on the monthly payment and not on the total cost of the car, it’s easier to mask the total cost of the car by stretching out the length of the loan and lowering the monthly payment.
People with poor credit are much more likely to take out these longer term loans. The fact that poor credit customers also wind up with loans with the highest interest rates, they can actually wind up really hurting themselves here.
In a worst case scenario, you could find yourself owing more on your auto loan than the car is actually worth. New cars lose up to 25% of their value every year according to Edmunds. To save the most money, get a loan with monthly payments you can afford for the shortest term possible.