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5 tips to avoid overspending on a car loan
Reading through your contract carefully and avoiding a long term can help you save thousands.
Interest rates for car loans may be declining steadily, but vehicle prices continue to rise. A single mistake during the car-buying process could cost you hundreds — or even thousands of dollars over the life of your loan. Following a few simple tips can help you navigate these often murky waters and prevent overspending on your next car loan.
1. Compare rates before visiting the dealership
One of the most common pieces of advice — and one that bears repeating often — is to get preapproved for a car loan with two or three lenders before you visit a dealership. Not only will this allow you to see what types of rates you can expect, but you’ll also have another tool in your arsenal when it comes time to negotiate. Dealerships are notorious for marking up interest rates to earn a larger profit. When you compare rates before you buy, you can ensure you’re getting the best deal available to you.
2. Opt for a shorter loan term
The longer your loan term, the more you’ll pay in interest. While opting for a lengthy term will lower your monthly repayments, it can cause you to go upside down on your car loan. This means you owe your lender more than your car is actually worth. Although there are 72- and 84-month terms available, Edmunds recommends opting for no longer than a 60-month loan term. And if you’re buying a used car, try to keep your term even shorter: a 36- or 48-month term can save you thousands of dollars over the life of your loan.
3. Focus on the overall price of the car
With 84-month terms available on new cars, keep a strict rule about how much you’re willing to pay overall for the vehicle. Negotiate the actual price of the car without putting too much stock in the monthly repayments. Salespeople try to inflate the price of the car to meet the amount you’re willing to pay monthly by tacking on add-ons you don’t need.
4. Be on the lookout for fees
Before committing to a specific lender, make sure you understand any fees you might be charged on top of interest. Many banks and credit unions charge an origination fee when you first take out a loan, which is often included in your loan’s APR. If you think you might want to pay your loan off early, ask about whether you’ll face a prepayment penalty for making extra repayments. Most lenders also charge a late fee, though you might want to see if there’s a grace period if you miss a payment by just a few days.
In addition to regular fees for borrowing, you’ll also be responsible for sales tax, registration costs and licensing fees. These vary depending on your state, the car you buy and the dealership you choose, so call around to see what it might cost you.
When working with both the lender and dealership, ask for a breakdown of fees. You could negotiate these if you found a more competitive offer elsewhere.
5. Review your terms before signing
Signing a loan contract binds you to it — no matter the terms inside. Before you commit to anything, read through the contact carefully, making note of the interest rate, loan term, fees and monthly payment. Be on the lookout for any language that might be signs of a scam, like extra fees you don’t remember discussing. If anything seems amiss, ask. If your lender or salesperson can’t explain it, you may want to hold off on your purchase until you can find a more reputable provider.
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Updated December 6th, 2019
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Bottom line
Getting preapproved for a car loan with a few lenders before you hit the dealership can help you score a competitive deal. But you’ll also want to pay close attention to your loan term and any fees you might be charged to avoid overspending.
You can learn more about how it all works and compare lenders with our guide to car loans.
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