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Purchasing a car is an exciting milestone in life, but it’s important to approach it with caution, especially when it comes to financing the purchase. Car loans are a common way to afford a vehicle, but they can also lead to financial pitfalls if not handled wisely. In this article, we will discuss some common car loan mistakes that people make and provide tips on how to avoid them.

Read our previous article that may help you in buying a car.

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8 Car Loan Mistakes

1. Not doing enough comparison shopping

The first and most common car loan mistake is that not doing enough comparison shopping. The easiest and most simple way to obtain a car loan is through the dealer’s financing; however, this option does come at an additional expense. To ensure that they make a profit, dealers will frequently mark their rates up by a few percentage points.

To avoid common car loan mistakes, it’s recommended to engage in comparison shopping and gather multiple quotes from various banks and credit unions before heading to the dealership. This approach allows you to gain a better understanding of the interest rates available based on your credit score, enabling you to secure the most favourable deal. Keep in mind that banks may have stricter criteria compared to credit unions, but they could potentially offer better interest rates than those offered by dealerships. If you’re a first-time car buyer, it might be worth inquiring about financing packages specifically tailored for first-time buyers at credit unions. By considering these factors, you can make an informed decision and avoid potential car loan pitfalls.

After you have been pre-approved for a loan, you will have a better chance of successfully negotiating with the dealership. You do not need to rely on the dealership’s financing in order to acquire the vehicle of your choice if they are unwilling to offer a lower interest rate than the one you already have.

Key takeaway

A pre-approval will ensure that you receive the most favourable rate that is currently offered and provide you with more bargaining power.

2. Attempting to negotiate a lower monthly payment rather than a lower overall purchase price

Although the monthly payment on your auto loan is crucial, and you should know in advance how many automobiles you will be able to afford each month, it shouldn’t be the basis of your price negotiation. Instead, you should focus on finding a car that fits your budget and meets your needs.

A monthly car loan figure, once volunteered, indicates to the dealer how much you are willing to spend overall for the vehicle. Another possibility is that the salesperson will try to conceal additional fees, such as a higher borrowing rate or more add-ons. They might also try to sell you on a longer repayment schedule, which would ensure that the monthly payment stays within your financial means but will end up costing you more money in the long run.

Instead of concentrating on the amount that must be paid each month, you should try to negotiate the purchase price of the vehicle as well as each fee that the dealer requires.

Key takeaway

Never make the decision to buy a car based solely on the monthly payment amount, as the dealer might use that number to either put a halt to the discussions or try to upsell you.

3. Leaving your creditworthiness up to the discretion of the dealer

A borrower who has a high credit score is eligible for a better interest rate on their auto loan than one who has a poor credit score. Your creditworthiness is what decides your interest rate. If the interest rate on a car loan for $15,000 spread out over 60 months was reduced by only one percentage point, the borrower might save hundreds of dollars in interest payments over the course of the loan.

You will be in a better position to negotiate if you are already familiar with your credit score before beginning the process. You will be able to determine what rate you may reasonably anticipate, as well as whether or not the dealer is attempting to overcharge you or is lying about the terms to which you are entitled.

What exactly is considered to be a poor APR for a car loan?

According to the statistics provided by Experian, the average interest rate for brand-new auto loans was 5.16 percent for the third quarter of 2022. People with good credit were eligible for interest rates in the range of 3.84 percent, while people with poor credit had an average new automobile interest rate of 12.93 percent.

The interest rates on used autos were significantly higher across the board, increasing by 9.34 percent. And the rate for those with poor credit was an astounding 19.81 percent on average.

Therefore, an automobile with an annual percentage rate that is closer to the higher end of these numbers is considered to have a “poor” rate. According to the law, annual percentage rates (APRs) on loans cannot exceed 36 percent. Find a lender who will provide you with a rate that is at least equal to the average for someone with your credit score.

Key takeaway

Before heading to the dealership, you should do some comparison shopping with a variety of lenders to get an idea of the interest rates you might be offered and take any steps necessary to enhance your credit score.

4. Failing to select the appropriate term length

Car loans can span from 24 months to 84 months, and it’s crucial to avoid common car loan mistakes. While longer loan durations may tempt you with enticingly low payments, they come with a drawback. The extended repayment period results in higher overall interest payments. Additionally, opting for a longer time frame increases the likelihood of ending up with negative equity on the loan. Some lenders mitigate this risk by imposing higher interest rates on longer-term loans. Hence, it’s essential to be aware of these car loan mistakes when considering the duration of your loan.

Consider what is most important to you in order to select the alternative that will serve you in the greatest way. For instance, if you are the type of driver who is interested in getting behind the wheel of a new vehicle every few months, then being locked into a long-term loan might not be the best option for you.

On the other hand, if you are working with a tight budget, the only way you may be able to buy a car is by signing a lease for a longer period of time. Make sure you understand how much your monthly payment will be before using a vehicle loan calculator to determine which choice is best for you.

Key takeaway

A loan with a short repayment duration will have higher monthly payments, but the overall interest cost will be lower. A loan with a longer repayment term will have lower monthly payments, but the overall interest cost will be greater.

5. Methods for Paying for Extras and Upgrades

Add-on sales, including aftermarket products offered by the finance and insurance office, can be a profitable revenue stream for car dealerships. However, it’s important to be cautious and avoid common car loan mistakes. If you’re interested in an extended warranty or gap insurance, it’s worth considering alternative sources outside the dealership. These sources often offer these products at lower prices compared to what the dealership charges. By being aware of these car loan mistakes, you can make more informed decisions about your purchase and potentially save money.

If you include these add-ons in your financing, you will be charged interest on them, which will make the overall cost of the transaction more expensive to you. In order to prevent unneeded additions to the total cost of your purchase, it is important to question any fees that you are unsure of.

If there is an optional extra that you really desire, you should pay for it out of your own wallet. Even better, try to see whether it can be purchased elsewhere, preferably for a lower price. When it comes to aftermarket equipment, extended warranties, and gap insurance, it is typically more cost-effective to purchase these from a third party.

Key takeaway

Financing add-ons will, over time, result in an increase in the total amount of interest that is paid. You should come to the table prepared to negotiate and be aware of the add-ons that you genuinely require as well as those that you may obtain elsewhere for a lower price.

6. Carrying forward a loss in property value

On a car loan, you are said to be “upside down” when you owe more money on your vehicle than it is now worth. It’s possible that your lender will let you roll over negative equity into a new car loan, but doing so is not a good idea from a financial perspective. If you do that, you will have to pay interest on both the car you currently have and the one you had before. And if you were in the red after your previous trade-in, there is a good likelihood that you will be again.

It is recommended that you pay off your existing loan before you apply for a new one. This will prevent you from having to roll the negative equity into your new loan. You also have the option of paying off your negative equity immediately to the dealer in order to avoid paying any more interest.

Key takeaway

Avoid carrying forward a vehicle that has a negative equity balance. Instead, you should either pay off as much of your previous loan as you can or pay the difference when you trade in your vehicle.

7. Failing to take into account the potential for incurring prepayment penalties on your auto loan

When getting a car loan, it is imperative that you study every single detail of the contract before signing anything. If you pay off your loan ahead of schedule, you may be subject to additional fees from some lenders. Lenders generate revenue from the interest that borrowers pay over the course of the loan’s duration.

Therefore, if you promised to pay interest for a period of 6 years but paid off your loan in 4, the lender will only receive interest payment for the period of time that they received the loan. Many of them will ensure that there is a prepayment penalty so that they may recoup their charges. This is because they are in business to make money.

Thankfully, not all lenders operate in this manner. To reiterate, it is imperative that you conduct extensive research to locate the most favourable loan terms possible. Do your homework, and don’t be in a hurry.

8. Making the incorrect decision between a loan with a low-interest rate and a cash rebate

Before making a decision regarding a cash rebate or a low-interest car loan provided by a manufacturer, it is essential to conduct thorough research. By avoiding common car loan mistakes, you can maximize your savings. Keep in mind that the optimal strategy for obtaining the greatest savings may vary from one offer to another. It is crucial to consider this advice provided by Reed and make an informed choice.

There is a calculator available on the bank rate page, which makes doing comparisons much easier. It is important to be aware of your credit score before engaging in conversation with a finance manager because low-interest auto financing offered by manufacturers is not accessible to everyone. According to Reed, “Your credit must be really good if you want to secure low-interest financing.”


Avoiding these common car loan mistakes can save you money, reduce financial stress, and ensure a smoother car-buying experience. Take the time to research loan options, consider the total cost of borrowing, improve your credit score, budget for all expenses, and make a sufficient down payment. By being informed and proactive, you can make wise financial decisions and enjoy the benefits of car ownership without unnecessary financial burdens.

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