Thursday, July 31, 2014

Car Buying: 10 Biggest Mistakes Made By Auto Loan Customers

Consumers either desperate for transportation or excited about a new purchase often forget that a vehicle is a major purchase. For most consumers, a vehicle is the most expensive purchase they will make aside from their home. Most people wouldn’t rush out and buy a house without careful consideration and it should be the same way when purchasing a vehicle… especially when you’re financing.  Here are 10 of the most common mistakes borrowers make and how to avoid them.


 1. Letting the dog eat your homework…
In the age of the internet, there’s is no excuse for not doing your research. Hundreds of sites offer unlimited information about vehicles in your area, interest rates, pricing, and loan offers. Aside from vehicle and loan sites, you need to know exactly where you stand and how much you can afford to purchase.  An educated consumer is a good business’s best friend, and a bad business’s mortal enemy. Find what cars are available in your area along with prices and values. Educate yourself on what interest rates are typical, and what dealers offer the best financing options for your credit situation.
2. My credit score is WHAT?!?!
Again, in the age of the internet, there is no excuse for not having a clear picture of your financial situation. Don’t let the dealer or finance company tell you what your credit rating is. You can get that information yourself easy and free. If you haven’t already, pull your yearly free credit report. If there are small or old accounts that can be corrected, do so before going to the dealership. Even a small jump in your score can make a huge difference in your interest rate and loan amount. Know your total financial situation and budget. How much do you bring in a month? How much of a payment can you make? You don’t want to be searching for the answers to these questions after you’ve fallen in love with a car and are sitting in front of a salesman.
3. Nearly catching your pants on fire…
Lying to yourself about the amount you can spend while still being comfortable enough to handle unexpected issues that arise doesn’t help anyone… especially not you. Experts suggest that your total monthly car expense should be no more than 20% of your net income. There are a plethora of budget calculators on the web like the ones here and here. Figure out exactly how much you can afford and avoid disaster later. No matter how much you love your car, you’re going to hate it when you have to make a payment you can barely afford each month. Don’t forget to budget your car insurance with your payment... which brings us to number 4…
4. Forgetting about insurance...
You will have to get full coverage insurance on your vehicle for the length of the loan. If you don’t already have insurance, call around and get quotes. At least have an idea of the cost each month. Many consumers see a car payment of $250.00 and think “I can afford that EASY!” without considering the fact that an extra $150.00 in insurance brings that monthly expense to $400.00. You will need to consider this when you are trying to figure out how much of a monthly car payment you can afford. Speaking of monthly payments…
5. Considering the monthly payment instead of the total price…Been on Craigslist lately? If you’re looking for a car you probably have. A notorious trick some dealerships have been using online is putting the monthly payment (and sometimes weekly.. ALWAYS read the fine print) in the price field instead of the actual price of the car. That “low payment” amount is usually the longest term loan, and you can end up paying a bundle in interest. Go to dealers that list the prices of their cars clearly online or in the store. If you find a car that you love at one of these dealerships that advertise monthly prices instead of cost, make sure you get the actual price of the car from the dealer up front.
6. Long and lean is good for super-models, not car loans…
Smaller monthly payments on a longer loan can be appealing to buyers, but financial experts suggest you take the shortest loan that you can comfortably pay each month. The longer the loan, the more costly interest you will pay. If you don’t have a choice and have to take the term, at least make a few extra payments now and then and pay the loan off early
7. Putting their pants on backwards…
Always shop for the loan before you shop for the vehicle. Shopping for the car before you find out what you’re approved for is like shopping in a store without knowing the balance on your debit card. You could be ridiculously under or over your price range. Find out how much a bank or dealership will loan you first. That way, you can shop within your range and avoid being heart broken when you find that perfect car… that you can’t afford.
8. Gap isn’t just for great chinos…
What’s Gap? Gap is Guaranteed Auto Protection or Guaranteed Asset Protection, depending on who you purchase it from. When you suffer a total loss on your vehicle by theft or accident, auto insurers are going to pay you the current cash value of your vehicle. That can be thousands of dollars less than your actual loan amount. If you total your car a month after you buy it, you could be stuck owing the loan company the difference, and be out a vehicle. Gap insurance covers the difference between what your auto insurer pays and what you owe the bank. Not all borrowers need Gap. If you purchase your vehicle with a large down payment, or have a short term loan, Gap could be a waste of money. You will need to figure out if you are “under-water” (you owe more than your insurer’s replacement cost) and for how long you will be that way. Some lenders require that you purchase Gap as a condition to the loan. Ask the dealership about what Gap options are required. If it’s not required, make an educated decision on whether or not to purchase it.
9. Buying new…
An automobile is one of the worst investments you can make. The old adage “You lose thousands just driving off of the lot” isn’t far from the truth. One minute after purchase, your car has decreased in value by 11%. By four years, your vehicle is worth half of what you paid for it. Sure, you won’t have that “new car smell”, but with the thousands of dollars you save by buying used you can purchase three lifetimes worth of “new car smell “ spray instead.
 10. Being the hare, not the tortoise…

Slow and steady wins the race. It’s difficult to avoid feeling desperate if you have lost your transportation, but more car buying disasters have happened to rushed buyers than The Beatles have hits. If your just looking to upgrade or get out of an unaffordable payment, take your time and do things right. If you’re without a vehicle and in need of transportation, taking the extra time to avoid mistakes can be difficult but it’s always worth it. Get help from friends while you’re shopping around and figuring out your budget. With the money you save, you can buy them a pizza for their trouble.