Over 6.3-million cars sold in the United States in 2017. CNN Money says, “A record 107 million Americans have auto loan debt, according to data released this week by the Federal Reserve Bank of New York. That’s about 43% of the entire adult population in the US.”
Borrowing money to buy cars—new or pre-owned—is part of the American lifestyle. That doesn’t mean buyers and borrowers are making good lending deals. Too many make too many mistakes when seeking a loan to finance their car.
Avoid these 3 common car loan mistakes:
Forgetting your budget
You must approach the car dealer with a firm budget in mind. Buyers can be swayed by car color, trim, and finish. But, you must have a budget in mind. That budget has little to do with the sticker price on the car. It has everything to do with what you can afford.
You must budget the monthly payment along with your mortgage payment or apartment rent. You must include monthly payments for utilities, food, entertainment, and other debts. So, you don’t want to see extras and add-ons run up your monthly car payment. Our loan calculator will help you budget better.
There is no excuse for not shopping around. You don’t want to be drawn to the dealer’s advertised deals in the Sunday paper when the Internet lets you explore the products on sale at every dealer within miles of your residence.
Other websites, including Kelly Blue Book and Edmunds, offer extensive reviews on the performance of make and model of every car on the market. They also give you the estimated cost of a purchase and/or trade-in. In any case, you do not want to approach a car salesperson without a detailed choice in mind.
It’s one mistake to tell the dealer what you are willing to pay each month. It’s another if you can secure loan approval ahead of time. The auto loan interest rate at your favorite bank or credit union are likely to be well below what the dealer offers.
Securing pre-approval for the amount and monthly payment you can budget lets you shop more widely. And, it gives you more control over the purchase. Because car shopping can be emotional and impulsive behavior, separating the lending arrangement from the purchase option gives you more leverage to make an intelligent deal.
Eyeing a new set of wheels?
The Los Angeles Times reports the downside, “New cars depreciate by about 20% as soon as you drive them off the lot and lose roughly half their value in the first three years. The vast majority continue losing value until they’re sold for scrap. Only a handful of classic cars ever appreciate.”
Having said that, most people will still finance their cars with loans. It’s helpful to realize you are really financing a loss when you do your budgeting. That should not discourage your borrowing, but it can shape your deal for the better.