Common Car Loan Mistakes and How to Avoid Them
Financing a car is a big decision, and making the wrong move can cost you in the long run. At Service One Credit Union (SOCU), we want to help you make informed financial choices so you can drive away with confidence. Here are some common car loan mistakes and how to avoid them.
1. Not Checking Your Credit Score First
Your credit score plays a major role in determining your interest rate. Many buyers skip this step and end up with higher payments than necessary. Solution: Check your credit score before applying and take steps to improve it if needed, such as paying down existing debts or disputing errors on your credit report. We also offer FREE Credit Counselors who can sit down and discuss your credit and finances one on one with you!
2. Not Getting Pre-Approved
Without pre-approval, you might not know how much you can actually afford. This can lead to choosing a car with payments that stretch your budget. Solution: Get pre-approved through SOCU to understand your loan terms and strengthen your bargaining power at the dealership.
3. Focusing Only on the Monthly Payment
A low monthly payment might seem appealing, but it could mean a longer loan term and higher overall interest costs. Solution: Consider the total loan cost, including interest, rather than just the monthly payment. We have loan calculators to help plan your budget.
4. Not Shopping Around for the Best Loan Terms
Many buyers take the first loan offer they receive, often from a dealership, without comparing rates. Solution: SOCU typically offers lower rates than dealerships and banks. Always explore your options to get the best deal.
5. Ignoring Additional Loan Protection Options
Unexpected events like car accidents or mechanical breakdowns can leave you financially vulnerable. Solution: Consider GAP insurance to cover the difference if your car is totaled and Mechanical Repair Coverage to protect against costly repairs.
6. Skipping the Down Payment
Zero-down financing might sound great, but it can leave you owing more than your car is worth. Solution: Aim to put down at least 10-20% of the car’s value to reduce your loan balance and monthly payments.
7. Overlooking Loan Fees and Terms
Some loans have hidden fees, early payoff penalties, or unfavorable terms. At SOCU we do not have early pay off penalties and we offer up to 90 days before your first payment. Solution: Read the loan agreement carefully and ask questions about anything you don’t understand before signing.
8. Taking on a Loan That’s Too Long
Longer-term loans (72-84 months) might seem appealing due to lower payments, but they come with more interest costs and a higher chance of being upside down. Solution: Choose the shortest loan term you can afford to minimize interest and pay off your car faster.
9. Financing Add-Ons into the Loan
Dealerships often encourage rolling in add-ons like extended warranties and service plans, which increases your loan amount and interest costs. Solution: Pay for add-ons separately or compare pricing to ensure you’re getting the best deal. At SOCU we offer Loan Debt Protection to give you peace of mind in the case of an unexpected life or financial event.
10. Not Refinancing When You Qualify for a Better Rate
If your credit improves or interest rates drop, refinancing could save you money. Solution: If your loan payment is too high, or you would like to pay it off sooner, come talk to us and see what solutions we can offer you.
Final Thoughts
Avoiding these mistakes can save you thousands of dollars over the life of your loan. At Service One Credit Union, we’re here to help you make smart financial choices. If you’re ready to get pre-approved or want to explore refinancing options, contact us today!