After the excitement of picking your new car, it’s time to focus on paying for it, which you’ll likely do through financing. If a car loan is your preferred method of payment, make sure you understand that you will probably end up paying more than the agreed upon price due to interest.
In spite of this, more and more people in Canada are taking out auto loans. According to a report by Moody’s Investor Services, loans on passenger vehicles reached $64-billion at the end of 2013. One main reason is because banks are now offering longer terms, some lasting as long as 96 months (or eight years). Taking out a loan is a risky decision no matter how you slice it, and should not be made hastily. Familiarize yourself with these nine simple car loan mistakes and do your best to avoid them, lest you end up on the “debt treadmill.”
1. Looking at Monthly Payments Only
It’s easy to be wooed by low monthly payments, but don’t get blinded by them because you can easily lose track of what you’re paying in the long run. For instance, a dealer may charge you $200 a month, but as a result, your term could last eight years and your deposit could be $10,000. That’s why your best bet is to figure out the actual cost of the vehicle, which is the retail price, plus mandatory fees and tax, and calculate the monthly payments and deposit yourself. You can find more tips on how to do that right here.
2. Settling for a Long Term
When getting a car loan, the timeframe with the best interest rates is between 36 months and 60 months (three to five years). After that, there is a breaking point and the interest rate goes up significantly.
In 2013, the average interest rate for a car loan from 55 to 60 months was 2.4% and the average interest rate for a car loan from 73 to 84 months was double that – 4.8%. A lengthier loan may save you money on a monthly basis, but it can end up costing you twice more than a shorter term.
3. Failing to Review Your Credit Rating
Before you can even get a loan, you must first be approved by the lender – i.e. the bank. Your credit rating is the determining factor, and you should know it before you even start car shopping. The rating is based on something called a “FICO” score, which is a three-digit number. The higher the number, the better the rating, and the more likely you’ll get a favourable loan.
Knowing your credit rating will prepare you for potential circumstances at the dealership. That way, a dealer cannot tell you that your rating is lower than required because you would already know it. In addition, reviewing your credit rating before purchasing a car will alert you to any errors or problems you might be having. You don’t want bad credit to sneak up on you.
4. Ignoring Negative Equity
Negative equity occurs when the value of your car is below the outstanding balance of the loan made to purchase the vehicle. Simply put, the car owner owes more than the car is worth. The longer you extend your loan, the more time it takes to earn equity.
Negative equity becomes a problem when you decide to sell your vehicle. If a car buyer is willing to purchase your vehicle, he or she will only have to pay what its worth, while you will still have to cover what you owe to the bank. The same applies to your insurance company, if you happen to total your car in an accident. Negative equity is a bad thing, and the faster you can get out of it, the better.
5. Financing the Price of Add-ons That Can Be Bought Separately
A 2009 report conducted by Torrance – a California-based finance and insurance management and technology magazine – stated that 29 per cent of the average gross profits in new and used cars came from add-ons. These add-ons are included in the overall price and add to the interest rates. Be wary of add-ons and fees that dealerships introduce into contracts. They may sound good on paper, but make sure you know if they are actually necessary before giving the okay.
Don’t let your ignorance cost you extra. Purchasing add-ons separately may cause you to pay a mark-up price and a fee for installation, but at least it won’t increase your loan.
6. Accepting the First Offer the Dealer Makes
Dealerships buy financing from banks and other institutions, and because of that, they are able to offer higher rates to turn a profit. You should not accept the dealer’s first offer because of this reason. Call up other dealerships and shop around to see if the offer is in fact fair.
7. Failing to Create a Proper Monthly Budget First
How can you be certain that you can manage your vehicle’s monthly payment if you don’t even know your monthly budget? Owning a car entails more than just monthly payments. When purchasing a car, many buyers only look at the flashy monthly rates and forget about the other aspects such as insurance, maintenance, fuel and so on.
Creating a monthly budget without omitting those critical parts will give you a better perspective on the car you want to buy and the payments you’ll have to deal with down the road.
8. Letting Emotions Dictate Your Decisions
Buying a new car is an emotional process. You want to drive off as quickly as possible, but you also don’t want to agree to a term you cannot afford. The only way to have control of your emotions is by preparing in advance. Know how much you are prepared to pay before you enter the showroom and make sure that line is not crossed. Take some time and do some research. The more knowledge you have on the car you wish to purchase, the less likely you are to make a mistake.
If the situation calls for it and you feel like the negotiation process straying, don’t be afraid to walk away. It may be frustrating, but being frustrated momentarily is better than agreeing to be in substantial debt.
9. Not Exploring All the Available Options
A car buyer has many options when financing a vehicle, and it’s worthwhile to explore all of them. Some people may choose to get a loan from the credit union, while others may find perks in getting it from their local bank. However, it’s better to look into companies that specialize in automotive financing because of the volume and frequency at which they handle car loans. Dealerships may also offer a better rate through their own banks.
We would discourage potential car buyers from taking out a personal line of credit. This option should be reserved for home purchases and emergency reasons. To learn more about other payment methods, read this article.
If you are looking for a car loan right now, simply configure your vehicle of choice with our free dealer cost report and get in touch with one of our dealers.
