How to Avoid Mistakes When Getting a Car Loan
It has become increasingly popular for people to get a car finance deal when they want to buy a car. With a lot of new cars costing more than many people can afford, people have found themselves turning to cheaper alternatives compared to buying the car outright, such as PCP or hire purchase car loan agreements. However, many drivers have found themselves confused by their car finance policy, and therefore end up paying more than they should do, due to a lack of understanding over the ins and outs of their agreement.
All of the different types of car loans can seem overwhelming to someone who hasn’t done any research in to the subject, which could result in people not getting the type of car finance they want or need. Continue reading as we outline how to avoid the common mistakes people make when getting a car loan.
Tips to avoid car financing mistakes
Setting a budget before financing a car is the best course of action and means people do not bite off more than they can chew. Ideally, budget-planning involves drawing up a rough estimate of monthly ingoing and outgoing costs, which helps people determine the amount that will be enough to cover the cost of the car. Not budgeting correctly can result in a failure to promptly meet monthly car loan payments, which affects credit rating and can create financial hardships.
As such, it is essential to consider a realistic budget for your car loan by taking into account the expenses you need to pay off every month. These expenses include your rent, mortgage, bills, as well as car-related costs like fuel, car insurance, road tax and MOT Tests. All of these costs can take up a large sum of your salary – so set a budget you’re comfortable with and one that will not cause a significant strain on your finances.
Use a car finance calculator
Another mistake people make when starting the car finance process is not making use of the car finance calculators that many brokers offer on their websites. Human mathematical errors are far too common, particularly when calculating loan costs. Thus, it is sensible to use a car finance calculator to explore the range of repayment scenarios available, and select one that suits your personal circumstances and budget. With a car finance calculator, you can feel more confident in the fact that you are getting the right car loan and one which suits your financial situation.
Know your credit score
Before applying for a car loan, you should know your current credit score, since it reflects the likelihood of you being accepted for finance altogether. Lenders use the information on your credit history to understand whether you are likely to be able to repay the debt, allowing them to assess the risk of lending you money. If you have a low credit score, lenders will feel it is riskier to offer you a loan, whereas with a higher credit score, lenders will be more willing to finance the amount you need.
Knowing your credit score is beneficial to yourself because you will know which interest rate you qualify for and should demand in any financing deal. Also, identifying your credit score will give you time to correct any errors that are bringing your score down, or provide you with time to make any outstanding payments and improve your rating.
Choose the best financing option
It is never a good idea to accept your first car loan offer just because it seems to be the easiest and fastest way of getting behind the wheel. Instead, take the time to approach dealers, banks and alternative lenders to weigh up your financing options and choose the best loan within your budget.
Find the right loan term
The length of the loan is important when it comes to financing a car, so make sure you pay attention to the duration of the car loan agreement. The longer the term, the higher the total interest you will pay overall. Despite having lower monthly payments, extending the length of the loan will allow the lender to get more money out of your pocket from the added interest. As such, don’t let yourself fall into the trap of signing a longer-term contract as, in the long-run, it may not be as cheap as you first thought.
Don’t fall for low-interest rates
Be very cautious when you’re offered a low-interest rate for your car loan. The starting offers are usually set very low to grab your attention, but this reverts to an extremely high-interest rate several months into the loan. Ensure you understand how long the introductory interest rate will last and when the interest rate will increase so you can calculate whether this loan is better than the other finance options you have been offered.
Read terms and conditions thoroughly
Some dealerships offer a low-interest rate upfront, but may include bad terms further into the contract. Bad terms can include receiving large payment penalties as a result of making an early or late loan installment. Likewise, you may find the interest rates adjustable, which could cause the loan to be more expensive down the line. As such, always read the loan terms thoroughly before entering into any agreement.
Understand balloon payments
A balloon payment is a series of fixed, low monthly payments, which defers repayment of the amount you’re borrowing to the end of the agreement. When you reach the end of the financing agreement, you need to pay a lump sum payment which can be quite a large sum – ensure you’re able to afford the last payment at the time.
Many people get themselves into a balloon payment agreement without understanding the contract and end up ignoring the lump sum payment that has to be made at the end of the contract, which is a problem for them and for the organisation they borrowed the money from. Balloon payments have become a less common type of car financing option but you should be aware of the real costs of borrowing if you do consider it.