Five mistakes that can lead to bad auto credit
As if we needed more bad news about buying cars, Consumer Reports analysis shows that many Americans are significantly overpaying on auto loans. And we can’t put all the blame on the pandemic or the supply chain issues.
In one case, Consumer Reports discovered that a Maryland resident with “sterling credit” who bought a new 2018 Toyota Camry two years ago will end up paying $ 59,000 when the loan ends. The reason: Their interest rate was increased to 19% when they actually qualified for a rate of 4.5%.
The Consumer Reports study, which looked at 858,000 auto loans, found that bad auto loans, rising car costs, and other factors pushed a car’s average monthly payment to around $ 600, or an increase of almost 25% over the past 10 years.
With a little education and free online tools like a car payment calculator, you can put together a loan that fits your budget and avoid some common car loan pitfalls.
1. Extension of the loan term
The term is the number of months it takes to pay off the loan. The longer the term, the lower the monthly payments. However, the longer you delay paying off a loan, the more interest you will pay.
For example, if a person with a credit score of about 600 buys a car for $ 30,000 and finances it for 60 months at 6.61%, they will pay $ 5,311 in interest. But if that loan is extended to 80 months, they’ll pay $ 7,175 in interest. That’s $ 1,864 more in smoke.
2. Don’t buy your loan
Before shopping for a car, you should really shop for a loan. Start by checking your credit and fixing any problems you find. Next, apply for a pre-approved car loan from a credit union or online lender. By doing this in advance, you can choose the down payment and loan term to suit your budget.
Obtaining pre-approval also simplifies the negotiation process, as it allows you to focus on the price outside. You can still take the financing from the dealer if the interest rate is lower. But your pre-approved loan will act as a bargaining chip to get its best rate.
3. Being “inside out” with a car loan
You are upside down on a car loan when you owe more than the car’s value. If you go through an unexpected life change – divorce, death, or family illness – and you have to sell the car, you’ll have to pay off the loan, plus negative equity.
On the other hand, if you have equity in your car, you can use it as a down payment on your next car. Or just sell it, pay off the loan, and pocket the difference.
4. Introduce negative equity into the new loan
If someone is upside down on a car loan, but they just need to buy that new car, the dealership will be happy to carry the negative equity onto the next loan. That way, a person who has $ 10,000 upside down on a car loan can buy a car for $ 30,000 and end up with a loan of $ 40,000.
There is no good reason to invest negative equity in a new loan. This can lead to a spiral of debt as you try to keep up with payments. Instead, keep driving your current car and try to make additional payments until you get the right way.
5. Buy extras
Sometimes the car you agreed to buy has some dealer installed options that are not on the sticker. If that’s not enough, the CFO may offer you an extended warranty, a wheel and tire warranty, or a prepaid maintenance plan.
All of these extras go into your balance on the sales contract and result in a much larger loan to repay. The best strategy is to eliminate these extras early in the trading process. I like to ask for an outside price with a breakdown of all costs and charges.
Here are several ways to stay in control of your auto credit:
Use an auto loan payment calculator to estimate your monthly payment. Try using different down payment terms and amounts to see what works best for your budget.
Be realistic about the monthly payment you can afford and look for a loan that meets this criterion.
Getting pre-approved for a car loan may be the best way to stay in control of your car purchase transaction.
Take on as little debt as possible by saving for a down payment of at least 20% of the purchase price.
Reed writes on the auto industry and finance for NerdWallet.com. His Twitter handle is @AutoReed.