Buying a vehicle is one of the biggest purchases you’ll make. If you’re like most of us, you’ll need a loan to pay for it.
These days, Americans are shelling out a ton of cash on auto loan payments. The average monthly payment for new cars in the U.S. hit an all-time high of $531 in August 2018, according to sales data from Edmunds, the popular website that lists car prices.
There’s a lot of money at stake for you here, so you’ve got to be smart about taking out a car loan. Here are three common mistakes to avoid:
1. Getting a Loan From the Dealership
When you buy a vehicle, the dealership will offer to finance it for you. It’ll tell you reassuringly that it’s the same kind of car loan you’d get from a bank. Heck, maybe it’ll throw in some special incentives — today only! You can take care of all this right now without even leaving the building, my friend!
Suuuure. Just nod your head politely and ask for the dealership’s best terms. Then shop around, because it’s not uncommon for dealerships to mark up interest rates on loans, or to add unnecessary fees. You can typically get a better deal on a loan from your bank or credit union, or from an online lender.
If you’ve already made this mistake, don’t worry! If you already have an auto loan, it’s not too late to get a better one.
2. Not Looking for a Better Loan Than the One You Have
You probably haven’t given your car loan a second thought since you drove your newly purchased vehicle home from the dealership and parked it in your driveway for the first time.
After all, this is the deal you’re stuck with, right? What’s done is done.
Wrong! Most people have no idea how easy it is to refinance a car loan and how much money they could save.
A company we like, called MotoRefi, makes it easier than ever. It partners with lenders — like community and regional banks — that can offer you good rates. In less than a minute, you could pre-qualify for a lower monthly payment, lower interest rate or both.
It won’t impact your credit score to check your rates.
MotoRefi says it’s saving the average customer $100 per month. It operates in 40 states and is expanding quickly.
3. Getting a 7-Year (or Longer) Car Loan
It’s a fact: Americans keep taking out longer and longer auto loans. Over the past few years, there’s been a sharp increase in the number of car buyers signing up for six- and seven-year loans, instead of the more standard five-year loans, according to the Consumer Financial Protection Bureau. These longer loans now account for 42% of all auto loans.
“These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car,” the bureau’s director said.
If you can, avoid auto loans that last longer than five years, financial experts advise. For one thing, look at all the extra interest you’d pay with a longer loan. And as your vehicle gets older and its parts wear out, you’d be shelling out money for car payments and car repairs at the same time.
Honestly, you’re better off buying a cheaper vehicle instead.
Look Beyond Your Monthly Payment
The amount of your monthly auto loan payment is determined by three things: the size of the loan, the interest rate and the length of the loan term.
If you’re thinking of refinancing your auto loan, check your rate with MotoRefi to see how much money you could save. But don’t focus solely on what your monthly payment could be. Look at the entire cost of the car!
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He has bought four cars in his lifetime, and each car was given an inappropriate nickname.
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