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10 huge mistakes to avoid when financing a car

As a car owner, chances are you have made car loan mistakes that cost you money in the past. From hidden fees attached to auto loan rates and dealer financing, to a lack of car negotiation skills or failing to read the fine print before signing, GOBankingRates examines the top ten major mistakes American auto shoppers make when getting a new set of wheels with a car loan.

1. Confirm the Auto Loan Rates for Your Loan

One of the first things auto shoppers should do when signing up for auto loans is to confirm the annual percentage rate of the loan.

According to Gregory B. Meyer, community relations manager at Meriwest Credit Union, car shoppers should be on the lookout for “add on” interest dealers might place on auto loan rates. These are auto loans in which the total interest paid during the loan is added up front to the loan amount.

“If the loan goes to the full term and is paid off, no extra money gets spent,” Meyer explained. “But if the borrower wants to pay it off early, they may pay an interest penalty.”

2. Negotiate the Extended Warranty

Many car buyers don’t know that negotiating the cost of the extended warranty offered by a dealership is even possible. For those interested in saving money on dealer financing, Meyer recommends checking out extended warranties offered by credit unions, which are often cheaper and more competitively priced.

3. Avoid Extra Coverage or Insurance Packages Added to Car Loans

Certified Financial Planner Joel Ohman advises car shoppers to remember that virtually all third-party auto finance companies require you to purchase full collision and comprehensive car insurance coverage on your vehicle until you have paid off the loan in full. Therefore, make sure to shop around for competitive outside resources for insurance prior to car negotiations and dealer financing.

4. Know When Your First Auto Loan Payment Is Due

One of the most common and costly car loan mistakes, according to Meyer, is not knowing the date of your first payment.

“Many loans start off with a late payment, often reversed for customer service purposes, because the borrower was not certain when the payment was due or the proper amount,” Meyer said.

5. Think Twice About Extension Offers for Auto Loans

Getting an extension on a car loan can be tempting at times, especially when you’re strapped for cash. However, CEO of H.E. Freeman Enterprises Harrine Freeman urges car shoppers to skip extending their car loans for more than four years.

“Paying a couple of more points in interest and extending the loan for another year or two is expensive,” Freeman explained. “Send extra money each month to pay the balance down faster.”

6. Make Sure You’re Getting an Actual Auto Loan From the Dealer

Many car shoppers wait until they arrive at the dealership before inquiring about car loans. While getting an auto loan through a dealership can be convenient, Blair Nastasi from MyRedToy.com described how many car shoppers can end up financing their vehicle purchases with a retail installment sales contract instead of a car loan.

“In some cases borrowers drive away with their car thinking they have a loan in place, only to find out later that the rate is actually higher, or they’re not approved and they need to bring the car back,” Nastasi said.

7. Look for Potential Penalties and Hidden Charges

A potential penalty many car shoppers don’t know about can occur when you pay your car loans off early. Credit insurance and other fees might also be included in your loan, hidden in the fine print. Make sure you don’t pay for these services unless you actually need them.

8. Double Check the Warranties Listed on Car Loans

“Most new cars come with extended warranties, so there is no need to purchase one,” Freeman explained. Therefore, avoid getting warranties that offer maintenance services or other gimmicks that will cost you extra money.

9. Watch Out for Auto Loans With Extra Fees

There are many standard expenses associated with buying a new car, such as delivery charges, titling fees and closing costs. Freeman encourages auto shoppers to always scrutinize any extra fees attached to auto loans.

“Don’t agree to any extra fees offered by the finance manager or sales manager — these are tricks to make more money off of you,” Freeman said.

10. Read the Fine Print

While we all know it’s important to read something before you sign on the dotted line, it’s especially important when reading the fine print during the auto loan process. Taking the time to do this can help you counter dealer financing offers and auto loan rates with even better ones you might have seen offered by other car dealers.

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