If you’re applying for a car loan for the first time, you may be unsure how they work or have some misconceptions on what you can and can’t do.
Understanding what your options are when it comes to car loans ensures you can get the best deal and save money where possible.
Here are seven misconceptions often made about car loans.
You can’t negotiate
Many borrowers assume the loan rates offered are set and there is no wiggle room, however, some car dealers and lenders have negotiable rates.
When applying for your first car loan you may not feel confident enough to negotiate on the price, but it’s always worth asking if you can get a better deal.
Do your research before applying for a car loan. Check out the rates available from banks, online lenders and car dealers to see what you qualify for. This will help you understand where you stand in terms of negotiating on rates.
You can only get a car loan for a new car
Some may assume a car loan is only available when looking to buy a new car, however, this is not the case. You can get car loans for used as well as new cars.
For some people, buying a new car, even with the assistance of a loan, is still outside their budget. A car loan for a used car can be a more affordable option, as the cost of the vehicle is lower overall, so you’ll have a smaller loan to repay.
Car financing is aimed at helping you get whatever vehicle you need, whether new or used.
A longer loan term will be easier to pay off
While you may think choosing a longer-term period is a better option as the repayment amounts are smaller and it will give you more time to pay off your loan, it can end up costing you more in the long run.
While a longer loan can reduce your monthly repayments, the additional interest will cost you more over the full period of your loan.
Ideally, you want a shorter loan term with lower interest rates but higher monthly payments, as long as it is within your budget.
There’s no point in refinancing
Often, refinancing your car loan can save you a significant amount of money.
When you first apply for your loan, interest rates may be higher, or you may not have a great credit score so your car loan rates are higher. Refinancing allows you to find a loan with better rates and save money.
When refinancing your car loan, make sure you’re getting a lower interest rate for a loan term either the same or shorter than your current loan. Also, check if you will be charged any additional fees for refinancing.
You should get the most expensive car with financing
Just because you qualify for a loan for a more expensive car, doesn’t necessarily mean you should go for it.
While it may be tempting to purchase the most expensive car you can with a loan, that can be a risky option.
You need to be able to afford your recurring repayments, while still having enough money to cover your expenses, savings, and any potential emergencies that may occur. You don’t want all your money to just be going into paying off your car.
Make sure you understand the terms of your loan and are realistic about your ability to afford repayments.
Interest rates are set in stone
Some dealers use interest rates to entice customers and may claim lower interest at a fixed rate.
Interest rates can vary depending on your circumstances and the loan, so you may not get the interest rate advertised. It may also depend on your credit rating as to what interest rates you qualify for.
Talking to a finance specialist ensures you get the best interest rates for your car loan.
You should pay the minimum amount
You may want to put down as little as possible so you can put more money towards other expenses. While technically you can just pay the minimum requirement for your loan, the more you can pay upfront, the better.
You should budget to pay as much of an initial down payment as you can comfortably afford. This will lower the overall amount left to pay on your loan, which will help lower interest. Also, try to budget so you can pay a little extra on your regular repayments so you can potentially pay off your loan sooner, providing your loan allows this.
Some dealerships or lenders may not require buyers with good credit to put down a down payment, and while this can be tempting, it can be a double-edged sword. You may find yourself in a situation where you owe more on the loan than the car is worth. A larger down payment helps avoid this.