5 mistakes to avoid when applying for a car loan
A car can be a major investment, and for many, a car loan is a necessary first step.
If you have never taken out a car loan before, you may feel intimidated by the application process, but it is not as challenging as you may think. However, there are some common mistakes people make when applying for car loans that can be easily avoided.
Not doing your research
While you may be keen to get your new car and have your loan approved, rushing the process can lead to mistakes that end up costing you. Always do your research first.
Before you even consider a car loan, research the type of car you’re after and how much it costs on average, so you know how much finance you will need.
Once you start comparing various car loans, look closely at the terms and conditions of each loan to ensure you don’t get caught out with high fees, and also look out for things such as penalties for early termination.
Make sure you also check the criteria of the car loan, as this can differ for various loans and lenders. When you’re researching and comparing various loans, check which criteria best suits your needs.
A finance broker may be able to help you better understand the process of applying for a car loan. They can provide you with expert advice and answer any questions you may have, to help make the process easier.
Not knowing your credit score
Before applying for a car loan, it can be handy to find out what your credit score is. Your credit score is an important factor in any loan application and just about every lender considers your credit profile when deciding what interest rate they will be able to offer you , so it’s important to know what it is.
If you don’t have a great credit score, that doesn’t mean you won’t be able to get a loan, but you may consider taking some steps to improve your credit profile before applying. Typically things like making payments on your existing credit cards or loans when they are due or making sure you don’t have any dishonoured direct debits from your bank account will have a positive impact on your credit score.
If you don’t know what your credit score is, you can easily find out through various online platforms or by asking your finance broker to run a check for you. Your credit report also lists your credit activity such as any other applications for finance, so make sure you check the details to make sure there are no errors on your file – follow up anything that doesn’t look like it should be there.
One final point – multiple applications for finance in a short space of time can have a negative impact on your credit score, so tread carefully when comparing individual lenders. This is where using a broker can help, as they are able to compare different lenders for you before applying.
Buyers who don’t know their credit score may find themselves being offered a loan with higher interest rates.
Not considering various finance options
There are numerous ways to finance your car, including taking out a loan from your bank, approaching a broker for a car loan or getting dealership financing.
It’s important to know which option is best for you and your financial situation so you don’t end up spending more than you can afford.
Some options may be better suited for you depending on the type of car you want or your current credit score. With each option comes varying fees and charges, so you need to think carefully before making your final decision.
You may also want to consider obtaining a pre-approval for your loan before approaching a car dealer, as this will let you know in advance the amount you are able to borrow and may put you in a better position to negotiate.
It’s important to know however, that applying at multiple banks to pre-qualify for a loan can negatively affect your credit score. This is also why visiting a finance broker can be helpful. They can assist you in gathering information so that you only go to a lender with whom you will have the best chance of acquiring a car loan.
Not knowing what you can afford
A key mistake some people make when looking at car loans is not having a clear understanding of what you can afford.
Before completing an application for a car loan, revisit your budget to make sure you can meet the monthly repayments.
Using an online loan calculator can also help you determine if you can afford the car loan.
You need to understand both your current financial situation and what it may look like in the future to determine what repayments you will be able to afford. Consider any debt you currently have, potential large future purchases, and even what would happen to your finances if you suddenly lost your job. All these factors may affect your ability to meet monthly repayments.
As well as repayments, you also need to consider other costs associated with owning a car, including registration, maintenance, and insurance.
Not negotiating with the seller/dealer
Another common mistake people often make when applying for a car loan is not negotiating with the seller or dealer. As a buyer you always have the right to negotiate, and if you avoid the first four mistakes, you will be much better positioned to do so.
It can be intimidating to negotiate for a better deal, especially if you are a first-time buyer, but if you don’t ask the seller or dealer for a better deal, you’ll never get one.
Before you negotiate with the seller or dealer, it’s important to do your homework, so you know what you can reasonably ask for. This will improve your chances of getting a deal on your purchase.
Short-term v long-term loan
When applying for a loan, many people look for deals that offer lower monthly payments with a longer repayment term. Taking a loan over a longer term will reduce your regular repayment amount but will mean you will end up paying more in interest overall for the life of the loan.
If you are in a position to do so, you may want to consider a shorter term instead. While the monthly payments may be higher, you can potentially end up saving money in the long run by agreeing to a shorter loan duration.
If this is a priority for you, you can look to request a shorter time frame up front, or you might consider a lender that offers low early termination fees, so if you finalize your repayments before the contracted loan term is up, you won’t face a unexpected payment at the end of the scheduled agreement, and you will also save a little interest at the same time.
This is where a broker can be helpful, as they will be able to tell you which lenders can offer this type of feature in their loans
As always, remember to consider your individual financial situation and how any new financial commitments will affect you before considering a new contract for finance.