For many, an auto loan is the best, most convenient solution to getting their hands on their dream car. If you also want to be a future car owner, an auto loan will allow you to have your own set of wheels without spending all of your personal savings. It is a quick way to own a vehicle as well; your loan application can be approved within a matter of days.
Although a car loan is an easy, fast, and cost-effective way of having your own ride, you may still encounter some problems during and after your application. You will certainly go through all these hassles if you don’t take care to avoid the usual traps that come with securing an auto loan.
Here are the seven traps you have to take note of and avoid when applying for an auto loan:
1. Shopping for a car without a pre-approved loan
Buying your first car can be pretty exciting. It can be so exhilarating that you may start talking to various car dealers, signing papers, and putting down a deposit right away even if you are not 100% sure you will get a loan.
But to avoid buying a vehicle you can’t afford and falling into a debt trap, get your finances in order first before visiting various car dealers.
Read about the different auto loan products offered by banks and other lending agencies. If possible, get a pre-approved auto loan from a bank or trusted lending agency.
With a pre-approved car loan, you can easily compare prices and features, and choose the best product. You will also be able to select a vehicle that fits your budget and won’t leave you broke for the next few years.
2. Failing to use a car loan calculator
A car loan calculator is free and easy to use so you shouldn’t have any excuse not to utilize it.
This online tool will give you a clearer picture of your car loan eligibility. In addition, this tool will allow you to explore various repayment scenarios by simply inputting different borrowing amounts, interest rates, loan terms and repayment schedules.
By knowing your borrowing and repaying capacity, you will be in a better position to deal with lenders. You will have better chances of getting good rates as well.
3. Not knowing your credit score
Aside from not using an online car loan calculator, failing to check your credit score before applying for an auto loan can land you in a heap of trouble, too.
If you have a low credit score, your loan will come with a high-interest rate. Because of this, you will end up paying more than you should for your loan.
To get a good interest rate on your loan that will allow you to save thousands of dollars over the term, use an online tool to know your credit score. Next, shop around for the best loan rate for your credit score. If your score is too low, it would be best to boost your credit score first and apply for financing once it becomes higher.
4. Putting too much stock into advertised rates
Another trap that first-time car buyers can fall into is focusing on the advertised rates of lenders instead of the comparison rates.
Most advertised rates do not include the fees which can include the application and break cost fees. As such, these rates are lower and, thus, can easily entice unwary buyers.
The comparison rate, on the other hand, includes all the related fees. Since you already know everything that you will have to pay for before you get your new car, you won’t be surprised by and worry about paying any unexpected fees.
To avoid this trap, check the comparison rate when comparing car loans. By doing so, you will understand the true cost of all the loans on offer better.
5. Choosing a lengthy loan repayment term
A longer repayment term, such as five years or more, means paying a smaller monthly amount. However, low monthly payments also mean paying higher interest in the long run.
Because of this, you will find yourself a slave to your auto loan for several years. Unfortunately, your vehicle will depreciate in value as well. When the time comes that you want or need to sell the car, you will have a difficult time selling it at the price you bought it.
As such, when applying for an auto loan, pick a shorter payment term that will work with your budget.
6. Failing to ask for discounts
Before you sign any agreement finalizing your purchase of a car, ask the dealer for any discounts you can avail of.
Most car dealerships offer a variety of discounts that will reduce the sticker price of your vehicle. However, many dealers won’t discuss them unless the buyer asks about them.
When talking with your dealer, don’t be embarrassed to ask about any discount you can get. Even the smallest price cut will go a long way to help you save money on your vehicle purchase.
7. Signing the car loan agreement without reading the terms
Lastly, even if you find the interest rate and other fees favorable, don’t sign the contract immediately without reading and understanding all the terms and conditions.
Make sure you read the contract carefully from top to bottom, front to back. Be on the lookout for terms regarding penalties for late payments and early repayment. If you do not agree with any of these terms, discuss them with the loan provider.
A good, professional lender will listen to your concerns and won’t hesitate to make the necessary changes or give suggestions to meet your requirements.
To avoid these costly and troublesome auto loan traps, conduct adequate research before you start shopping around for your dream car. Get as many details as you can about the different bank loan offers and compare them carefully.
When you are well-informed, you will be able to make smarter decisions and have a car that you will be able to pay for and happily own.