back to articles | July 05, 2022 | Dale Peterson

Categories: Auto Loans & Financing Loan Calculators & Rates

Avoid Auto Financing Mistakes

The economy is in shambles and inflation is kicking us all in the wallet. If you want to save money on your next car purchase, you'll need to do more than just strike a "good" deal by haggling with the salesman on the sticker price.


The economy is in shambles and inflation is kicking us all in the wallet. If you want to save money on your next car purchase, you'll need to do more than just strike a "good" deal by haggling with the salesman on the sticker price. A great way to save money on a new or used auto loan is to use online financing. Not understanding the online financing process can cost you money. Before we begin to share what some of the mistakes are, you might find this auto finance guide helpful. A mistake on your car loan could cost you money and erase the savings negotiated on the purchase price.

The biggest mistake is generally made in the dealership financing office and if you are aware of what they are, you may save thousands of dollars over the life of the auto loan. However, if you are already approved for your financing, you don’t have to get taken advantage of at the dealership. Here are five car loan mistakes that can cost you money.

A. Negotiating the Monthly Payment rather than the Purchase Price.

Here is a good one. Buying a car based on the amount of the monthly payment is a trap. Although you should know what you can afford each month, don't provide that figure to the salesman. If you do, you will forfeit your capacity for negotiating a lower purchase price. Do not let them turn you into a monthly payment buyer.

Once you volunteer a monthly car loan amount to the salesperson, it tells the dealer how much room is available to hide other costs such as a higher interest rate and add-ons. Negotiate the price of each cost category separately. Minimize the individual pieces of negotiation -- price, trade-in, and car loan financing. So that you get a handle on a few critical areas of auto financing, try these tools.

Loan Amount Calculator
Calculate how much you can borrow with the loan amount calculator. This tool is a convenience tool. The actual amount you can borrow may differ depending upon the actual terms of your loan and what you agree to at the dealership.

B. Do Not Let the Dealer Define your Creditworthiness.

Your creditworthiness determines your car financing interest rate. Your credit score (300 to 850) is your creditworthiness. It is based on your credit report with the three credit reporting agencies -- Equifax, Experian, and TransUnion. A borrower with a high credit score qualifies for a better new car loan rate than one with a low score. Shaving just one percentage point of interest from a $17,000 car loan over 60 months would save hundreds of dollars in interest paid over the life of the loan.

Interest Rate Estimator
Find out what type of interest rate to expect. Use this tool to enter your zip code, the loan type you want, and your credit information -- then click calculate to see rates in your area.

If possible, know your credit score before you set foot on the dealer's lot. Most people think their credit score is worse than it is. If you don't know your credit rating, the dealer can tell you anything. Consumers can find out how much they can spend and the interest rate they qualify for by getting a preapproved car loan. You can get pre-approved for a loan, with up to four offers without knowing your exact score. Try which has 24 lenders that can be matched to your needs and receive up to four real offers. These four lenders compete for your business, and it allows you, once you choose the offer that best fits your needs, to be a “cash buyer” at the dealership. You just tell them you are pre-approved, and you can then focus on getting the best price for your loan.

Payment Amount Calculator
Calculate how much your payment will be given a specific loan amount. The actual amount of your payment may differ depending upon the actual terms of your loan.

C. Making the Wrong Choice between Cash Rebate and Low-Interest Rate Loan.

If you want to take advantage of a manufacturer's offer of a cash rebate or a low-interest car loan, do your homework before deciding. The method that will get you the most savings varies from offer to offer, so do your homework.

D. Rolling Negative Equity Forward.

"Upside down" is the term used to describe owing more on your car than it is worth. The difference is "negative equity." When a dealer tells an upside-down consumer that he can fold that negative equity into the car loan financing of the next deal, he means that he will add it to the purchase price of the new car.

You will be paying interest on that negative equity for the term of the new loan. Moreover, if you were upside down on your last trade-in, chances are you will be that much more upside down next time. It's a horrible practice and should be avoided if possible. If you do, it will just make the problem worse. It's because people are buying more car than they can afford. The hard reality is that you must live within your means.

E. Financing the Cost of Add-Ons that you can Buy Separately.

Something to think about. “According to the most recent data from the National Automobile Dealers Association (NADA), the new-vehicle department of a car dealership accounts for about 58% of a dealership's total sales but less than 26% of a dealership's total gross profit. In addition to car sales, that figure also reflects profits from finance and insurance (F&I) products sold on new cars. That means such things as gap insurance, alarm systems, and extended warranties. The used-vehicle department represents only about 31% of a dealership’s total sales, but profit is close to that of the new-car department: nearly 25%. of a dealership's gross profit, according to NADA. In addition to car sales, the figure also reflects profits from F&I products sold on used cars”.*

Just “say no” is the best advice we can give you. "They are really there to make extra profit for the dealership by increasing interest rates, selling extended warranties, add-ons such as fabric protection, and paint sealant.

Even if you want an extended warranty or credit life insurance, these items are available at a lower cost from sources outside the dealership. Folding them into your car loan and paying interest on them for the life of the loan can add hundreds of dollars to the amount you pay. Make sure, to question every fee you don't understand. Don’t be embarrassed, it’s YOUR money you are trying to save!

If you’ll keep these factors in mind, you should be able to keep more money in your pocket. Good hunting and good luck!

* Source: Edmunds