5 Common Car Loan Mistakes To Avoid
Are you looking to buy a car on loan?
Is your car loan approval application turned down by the lender?
Buying a car is the one of the biggest decisions you ever make in your life. Owning a car in this era is a necessity and for some people it is the most dreadful decision.
So, they leave this decision to the car salesman or any dealership owner and end up getting a car loan at high interest rates. In some cases, they don’t even qualify to get a car loan.
In this blog, I will show you the top five car loan mistakes that people make while taking auto loans.
Let’s Jump in
1. Not Checking Your Credit History
The number one mistake that car loan borrowers make is not checking their credit report or credit history. Your credit score represents your trustworthiness as a borrower and tells a lot about your credit history.
A good credit score will be above 700 and achieving that number is easy if you are disciplined enough to pay all your payments at time. Lenders check your credit score and decide the interest they charge on your car loan.
If you have a good credit score then they will charge you lower interest rates and if you have a bad credit score, they still can approve your loan but at higher interest rates.
Well if you have a bad credit score then my advice is that you should first improve your credit score then apply for an auto loan.
If you know that you have a good credit score then it gives you a chance to negotiate at an interest rate. Even a 0.5% cut in interest rate will make a good difference in loan terms and save you a couple of bucks.
To get your credit card statement or credit score, you can visit sites like consumer.equifax.ca or call your crest card company and ask for credit card history and score as well. Some of these companies even generate a weekly report of your credit card and you can get all the information you need on it.
Another thing that auto loan lending institutions check while sanctioning car loans is FOIR (Fixed Obligation to Income Ratio). They calculate your present liabilities plus the liability of car loan and if the total score is above the 50% of your income then these lenders won’t approve your car loan application.
However, if they still approve then the interest on car loan will be high as compared to normal rates in the market.
Being an informed buyer, it is your responsibility to check your credit history and FOIR score and know your present financial situation. Applying for a car loan without checking these scores will be a waste of time and often these applicants are rejected by the lenders.
2. Not Doing the Comparison
There are two main sources from which you can get auto loans – financial institutions like banks, credit unions etc and from car dealerships. Both of these options have their own pros and cons. Even the terms of the loan and interest rate may vary from lender to lender.
The main mistake that people make is they go to a dealer recommended by their friends or either by their relative and take a car loan from there without doing research. The good thing will be to go from dealer to dealer or banks to banks and ask about their terms and conditions for loan.
Doing your own research by comparing rates of different lenders will save you from falling in the trap of a bad deal.
If you are looking for a car loan in Surrey, Vancouver BC then get in touch with our team of experts for fast pre approval.
3. Choosing Long Term for the Car Loan
The third mistake that people make is choosing a longer period for paying the loan. Sure it will lower your monthly payments but will hurt you in the long run.
We all know a car is a depreciating asset and if you are purchasing a new car its value falls by 40% at the end of one year. Taking a car loan for longer terms will only increase the interest you pay on the loan.
In some cases, you may decide to sell off the car after two years and pay the loan but the value of the car at that time will be less than the loan amount. You have to clear the loan amount from your own pocket.
According to an article published in cnbc, the financial expert Ramit Sethi advised that a loan term of 48 months or less will be good for minimizing the interest rate.
4. Very Low or No Down Payment
Many people fall into the trap of schemes like zero down payment or low down payment offers. This may sound compelling at first but if you flip the coin you will see that these schemes increase your overall interest on auto loans and hurt your finances badly.
A good idea will be to pay 20% down payment and if you pay 20% or more during down payment the lender will give you a loan at much lower interest rate than zero down payment scheme does.
Suppose if you buy a car for $30,000 then pay 6000$ upfront.
5. Not Calculating the Budget for Car Loan Payments
Now you have 20% ready for your down payment and duration of your car loan will be 4 years or less.
The last mistake that many car loan borrowers make is not calculating the budget for monthly payments and other expenses like gas, maintenance and repairs, insurance etc. Ideally, the monthly expenses of your car should be less than 10% of your income.
You have to do your maths or search in the forums and see the average monthly expenses of the model you are selecting.
After checking all the above mentioned points, you can now negotiate your terms on car loan and make a well informed decision of getting a car loan. Remember debt itself is not bad if you use it wisely and pay you monthly payments honestly.