Three Costly Auto Loan Mistakes

By | November 19, 2012

Buying a car is an exciting time, but sometimes that excitement can cloud your good judgement. It is easy to sit down at the negotiating table and sign any paper they want. But if you want to get the best deal possible you’ll need to have a plan in place beforehand that you will stick to no matter what. Here are three costly mistakes people commonly make at the dealership.

Budget

You may not know exactly which car you want to buy before heading off to the car lot, but you better know how much you’re willing to pay. Create a budget that lists your income and your expenses. See how much money is left over at the end of every month. Allocate some money for savings and some more for emergencies. The amount that’s left is all you can afford for a car payment. Do not go over this amount no matter what. When it comes time to decide on a car loan, your answer should be simple, yes if it’s below that number, no if it’s above that number.

Total price

Don’t just look at the monthly payment as the sole factor to determine how much your new car will cost you. Lenders will twist and contort your loan in all sorts of creative ways to get you the monthly payment you want. But by doing so they will ask for a higher down payment and will lengthen the loan term. What is more important than your monthly payment is the total amount that you will have to pay after your loan is paid off. You might find out that this $10,000 car is going to cost you $15,000. Keep that in mind because you will probably only be able to sell it for $5,000 later.

Down payment

Make sure and provide the highest possible down payment. You will want to give them at least 25% of the total cost of the car. By doing so you’ll ensure that you’ll get the lowest interest rate possible. When you give a down payment, every dime of that amount goes to pay down the principal owed on the car. Whereas with your monthly payments, part of your payment goes to the principal and the other part goes to the interest.

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