Top Financial Mistakes People Make When Buying A Car

by Hank Coleman

Mistakes when buying a car

We all make mistakes when buying a car, and a seemingly small mistake related to a car loan can actually cost quite a bit of money and erase the savings that have been negotiated on the actual purchase price of the vehicle selected.

If you want to get a great deal on your next car loan, you will need to do much more than just get a great deal by haggling with the salesperson or over the sticker cost.

The biggest mistakes related to a new car purchase relate directly to the finance side of the process. When you make the right decision and consider all the options, you will be able to save several thousand dollars – or more –over the life of the loan.

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Top 5 Mistakes When Buying A Car

Trying to Make a Purchase with a Low Credit Score

Regardless of your credit score, there are lenders out there who will provide you with a loan. What you may not realize is the extreme amount of interest you are eventually going to have to pay. This is simply because you are considered a bigger risk. When you have good credit, it means you pay your bills on time, don’t exceed your credit limits and have a good grasp on your finances. This is reflected in a high credit rating, which lenders are willing to give a great interest rate, reducing the cost of the vehicle purchased.

However, those with low credit can wind up paying obscene amounts of money in terms of interest. This can cost them big in the long run and there are some who actually wind up paying more than twice or more of the original cost of the vehicle that is purchased.

Negotiating a Lower Monthly Cost Rather than the Actual Purchase Price

Purchasing a vehicle based on the expressed monthly payment is essentially a trap. While you do need to know what you are able to realistically afford each month, this is not something the salesperson should know. If you let them know this, then you will forfeit your entire power for negotiating a better deal. You should not let the sales person turn you into a buyer based on monthly payments.

Once this amount is given to a dealer, they will know how much room they have to hide all the other costs – such as add-ons and higher interest rates. It is essential to negotiate each of the categories separately.

Letting the Dealer determine How Credit Worthy You Are

The creditworthiness will determine your interest rate, as mentioned before. The credit score is on a range of 300 to 850 and determined by the three reporting agencies. Remember, knowing what your credit rate is ahead of time is essential to ensure that you get a fair amount of interest for the vehicle you are interested in purchasing.

Lower Interest Loan vs. a Cash Rebate

If you are trying to take advantage of an offer from the vehicle’s manufacturer, and they offer either a lower interest rate or a cash rebate, then you need to do plenty of research prior to making your final decision. This means that you need to sit down and actually crunch the numbers to see which one will help you save more.

Rolling Your Negative Equity Forward

Chances are you have heard the term ‘upside down.’ This term is used to describe a situation where a person owes more on their vehicle than what it is actually worth. This difference in price and worth is referred to as negative equity.

When a dealer states to a person that they are upside down, then they can fold the negative equity into the new financing, it means that you are going to be increasing the overall cost of the purchase price.

This means you are going to be paying new interest on the old negative equity. Also, if you were upside down in the last vehicle trade-in, chances are you will be so in the next one, as well.

Financing any Add-Ons You Could Actually Purchase Another Way

The best advice you can get when it comes to add-ons is to ‘just say no.’ This is how the sales people at a dealership make a profit. If you fold these add-ons into your car loan and then pay interest on them for the entire life of the loan, this can quickly add up to hundreds and even thousands of wasted dollars. Also, if there is a fee that you don’t really understand, then you need to question it.

Even if you are interested in purchasing credit life insurance or an extended warranty, you will find these types of purchases are much more affordable from a third party provider. The general rule of thumb is that you should never pay at the dealership for these add-ons. Dealers can even write some type of official sounding fees into the contract. This is just an attempt to make more off of your purchase so it is essential to ask questions.

It is essential for car owners to be aware of what is going on and what is required when purchasing a vehicle. Going into a dealership with not idea of what to do, or how to do it can be detrimental to your financial health and well-being.

Take the time to review the information here and then make a purchase based on information, rather than what car you like best and what seems to be the best deal. If you don’t sit down and actually crunch the numbers, you will never know, for sure, what the best deal is and whether or not the one you choose is in your best interest.

As you can see, there are quite a few things that can go wrong with a car purchase if you are not informed and able to make smart decisions. When it comes to financing your vehicle, taking the time to get it right will pay off in the long run.

Have you made mistakes when buying a car? What were your worst mistakes when buying a car?

 

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 588 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 2 comments… read them below or add one }

Miriam

Great article, Hank, very helpful…

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Randolph Hoover

Awesome remarks. I’ll keep in tuned from more advice from you. This will surely be of help in the coming weeks!

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