Avoid These 5 Car Loan Traps

If you have fair to good credit, you will likely easily locate a car loan offer. Unlike other large loans, like mortgages, car loans require relatively little from you in terms of an application and financial qualifications. However, also unlike a mortgage, the lender is assuming very little risk with a car loan in exchange for a large potential gain. You assume the vast majority of both the risk and the expense of a loan, so avoiding common traps is an essential part of securing a good loan.

#1 Accepting the First Dealer Offer

Many dealers will advertise a guaranteed car loan offer to all purchasers. This is often broadcast on television, radio and billboard advertisements. While these offers may have very low interest rates, they are not necessarily the best offers on the market. Instead of simply going to a dealer and taking the first loan, approach banks and alternative lenders. You may find better interest rates elsewhere.

#2 Ignoring Terms

Dealerships are notorious for offering a low interest rate up front and then sliding bad terms into the contract on the back end. These terms may include exorbitant financing fees for late payment and large prepayment penalties. You may also find the interest rate is actually adjustable, which could make the loan far more expensive in the future. Rate is not the only criterion when evaluating your new loan.

#3 Using a Cosigner

A lot of dealers will ask you to have a cosigner on your loan; however, if you inquire about applying by yourself, you may find a cosigner is not even necessary. For a lender or car dealer, cosigners provide more security on the loan contract. For you, however, a cosigner will prevent you from gaining points on your credit score if you pay off the loan. You should only use a cosigner if you cannot otherwise afford the loan.

#4 Not Asking for Discounts

You dealer will have several discounts they can give to reduce the sticker price of your vehicle. There are discounts for teachers, students, recent graduates, home owners and more. Even though they have an arsenal of potential discounts to offer you, many dealers will leave these out of discussions if you do not ask about them. In order to capitalize, you need to ask questions about reducing the price of financing based on your circumstances.

#5 Shopping for a Car Before a Loan

If you shop for a car before you understand how much you can afford to take on in a loan, you may be mislead into purchasing a more expensive car than you can truly afford. A better choice is to determine your financial situation first and budget for a purchase. Then, approach banks and dealer financing companies to ask about the loan rates and monthly payments you can achieve through different sizes of purchases. Based on this information, shop for a car in the price range you determine to be practical for your budget.

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