Car loan process is definitely one of the major transactions that happen in one’s life. At the time of negotiation, many individuals say yes to anything the dealer says. Therefore, there are certain common mistakes people commit when getting a car loan.
1. Lack of homework on vehicle value
Don’t just look for the closest place to you when looking for the car you want. Search around for prices, and don’t forget to look up what your trade-in is worth. Here we’ll talk about the mistakes people make in not looking up prices for new, used and/or trade-in vehicles.
Not comparing price on new cars
It might be alluring to go to that one dealership down the street instead of checking out the prices of a few dealerships online around town. However, you could lose money doing so.
If you know the car you want, look up what other dealers in your region are selling it for. Dealers everywhere promote how far below MSRP they price their vehicles. MSRP stands for Manufacturer Suggested Retail Price, which is largely based on production costs.
The window stickers on cars have to show the MSRP and break down the costs that go into it. This includes all optional equipment (and how much it costs) that goes along with the car. So if you find a model you really adore, you can check out the window sticker to see the price variations on different trims for that model. The same type of car may be a few hundred dollars cheaper in a different color.
Once you find an ad for a low price on the vehicle you want, option A would be to go to that dealership. Option B would be to take that ad to another dealership and ask them to meet or beat it.
Not checking auto guides on used cars
While used cars don’t have an MSRP, there are three industry standards you can use to discern their value: the automotive guides Kelley Blue Book (KBB), Edmunds and the National Automobile Dealers Association’s guide (NADA). Dealers and lenders use them to determine vehicle price and worth.
If the price listed in one of the guides is below the car’s sticker price, then the car is overpriced. Show the dealer or seller that you did your research. The car should be priced around what the guide states is the fair market price based on location and condition. If the seller doesn’t agree to offer you a price near that figure, find another vehicle or another seller.
Not looking up the value of your trade-in
Similar to a used car, you can find the value for your trade-in on an automotive guide. Most guides have a range of values that show you what you can reasonably expect to get for the car. It can depend on the car’s condition and to whom you sell it. You can typically get more for your trade-in if you sell it yourself.
If you’re up to selling it, you could post it for sale on sites like Facebook Marketplace, Craigslist and Autotrader. This comes with the hassle of replying to prospective buyers and arranging times to meet for a test drive.
Most people prefer to trade in their old vehicle at the dealership. However, they often offer you a price that is less than what the car is actually worth. In effect, you’re paying the dealership to handle the hassle of selling your car for you.
Always look up the value of your trade-in before you go, so you’ll know what it’s worth prior to negotiation.
2. Focusing on the car over the car loan
Keep in mind that when you are looking for a vehicle, you’re not just paying for the vehicle itself, but the loan on it. Here are mistakes people make in financing their cars.
Only talking to one lender
Be aware of what APR (Annual Percentage Rate) you can get before you go kick some tires. Having several loan offers before you shop around for a car has a couple of advantages.
The first advantage is that you’ll be able to pick the best loan offer. If you settle on the first loan offer, you might miss out on a much better APR with a different lender. Each lender has its own requirements. You may qualify for different APRs depending on the lender.
It’s important to note that some lenders will do a hard pull on your credit. Bear in mind that multiple hard pulls will only count as one, so it is wise to have all of your hard pulls done at one time.
By shopping around, you can easily prevent a major way dealerships make money. Dealers can often increase the APR on a loan you get through them. For instance, the dealer might be able to charge you 7% APR, with 5% going to the lender and the 2% on top going to the dealer. If you don’t talk to various lenders and see what you can get, you won’t know you actually qualify for 5% APR and you’re likely to agree to the 7% APR. The second advantage of comparing offers is that you’re able to plan your budget more accurately. With a loan offer in hand, you’ll know how much you can borrow, what your APR is and thus what price range you can consider when looking at vehicles.
If you do have poor credit, your APR will probably be a significant part of what it costs for you to get a car. There are ways to find a car loan with bad credit, so plan and budget for it, so it doesn’t shock you. Canada Auto Experts can help you do so.
Refusing to talk finance with the dealer
Some individuals will bring a loan offer to a dealership and refuse to talk with the dealership financing office. This is mistake. Not asking the dealership to beat a loan offer means you could be leaving money on the table.
The dealership wants you to finance through them. Lenders often give dealerships a finder’s fee for each customer who gets a loan from them through the dealership. Unlike the first way dealers can make money on a loan (by increasing your APR), this way works to your advantage, as the dealer will want to beat the loan offer you have, because the lender they partner with will often pay them for it.
Overall, the dealer might not be able to beat your loan offer. But whether they can or can’t, by asking them to beat it, you’ll know you got the best deal.
Focusing on monthly price
The main considerations for many car loan seekers is is down payment and monthly payment. Those are the two major factors because it’s the easiest way to understand how the loan and the car affects their financials directly. However, if you focus on monthly price instead of total price, you’re giving the dealer the opportunity to hide extra products in there.
For example, if you tell the dealer you want a monthly payment of $321, and it turns out the loan with the car you want comes to $290 a month, the dealer can turn around and say, ‘Hey, I have great news, you can have a $321 car payment that includes an extended warranty! Sign here.’
All of a sudden, you just spent $1,500 on an extended warranty, which you may not know much about or even want.
There are many “add-ons” available at dealerships, including extended warranties and insurances such as GAP, life and disability. All of these things can be useful depending on the person and the vehicle. But don’t simply accept them. A monthly payment increase of $20 might not sound like much, but over six years, plus the APR you’re paying to finance it, certainly adds up. You can negotiate these products prices, so talk about how much each costs overall, not monthly.
Carrying over negative equity
If you have a trade-in car, the first step you should take after consulting an automotive guide to find how much the car is worth is to find out how much you owe. If the car is worth less than what you owe, you have negative equity.
The most common way to handle this is to add the difference, or “roll over” the negative equity, to your new loan. Financially, this isn’t a good idea. You’re less likely to get a good deal on your new loan because the loan is for more money than what the new car is worth. This can also get you stuck in a trap in which every time you want a new car, you’re stuck with the negative equity from the car before it.
There are a few ways to take care of negative equity, and here are some recommendations on what to do if you’re trapped in a bad car loan.
Negating your budget or not having one
If you know you can only afford $330 a month in a car payment (not including car insurance), don’t let someone persuade you to take on a $400 a month payment. If the loan you qualify for on the car you like can only be as low as $400 a month, that means you need to find a different car to like. You don’t want to be skipping meals in order to pay for it, or not be able to make the payments and have it repossessed.
In order to confidently decide what you can afford, you first need to chalk out your budget. A good rule is that all of your bills (rent, insurance, car payment, etc.) should be about 50% of your income. So look at your income and the bills you already have to see the margin between what all your bills add up to and the 50% amount of your income. That difference is a car payment you could comfortably afford.
The common rule of thumb about auto finance is that for every $1,000 you finance, your monthly payment goes up by $15, depending on your interest rate. Say the car you like costs $20,000, and taxes bring the cost up to $22,000 (taxes, tag and license fees can add up to 10% of sticker price, depending on the state). That rule of thumb would tell you to budget roughly $330 for a monthly payment ($15 x 22 = $330). Or you could do the longer math: Most car loans are for 72 months (6 years), and if you figure your loan APR will be 5%, then your monthly payment would be $355. Obviously, the rule of thumb is just that — a guideline. Doing the exact calculation or using a loan calculator can help you budget more precisely.
3. Doing things too quickly
Getting into a car loan could be a stressful process, so it’s understandable why you would want it over with quickly. However, you shouldn’t treat the process as you would ripping off a bandage.
Not walking away
If you’re not sure about a car or an auto loan and want time to think on it, take the time to think on it. Leave the dealership and take a break. Make sure you’re making the right decision for yourself, and don’t feel terribly pressured into making one quickly.
A salesperson might tell you the car want today could be gone tomorrow if you leave without buying it. That’s true, that specific car could be sold. Yet manufacturers make thousands of vehicles a day and people trade in used cars all the time. You can always find another to go along with your needs, which would be better than getting stuck in something you don’t completely like or can’t afford.
Being rude to salespeople
Ultimately, the people at the dealership are the people you’re relying on to provide a service. This article has covered what some of the more unpleasant people at dealerships can do. However, it does not account for the hard work and true customer care many dealership put into helping car buyers.
Many of the long-standing salespeople in the car business specialize in helping you make one of the largest financial decisions in your life. If you’re rude to them, you might realize that it takes longer to do everything, including negotiating on price. Basically, it’s in everyone’s best interest to practice common courtesy. Utilize a good salesperson’s expertise, and don’t allow the others to take advantage of you.
Car loan process can be taxing but you should remember that the best car loan you get is the one that helps you build your credit and does not jeopardize your finances. Canada Auto Experts specializes in that. Our dealer partners work with the major banks in order to give out the best possible approval considering one’s budget and lifestyle, at the same time, establishing one’s credit. Click here or call +1855-550-5565 to talk to a credit specialist today and get approved regardless of your current credit situation.