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23 Apr 2019   /   0 comments

How to Avoid Overpaying on Your Auto Loan

Caroline Mwandawiro
Money solutions

Applying for auto financing is a necessary step for many car buyers. After all, paying the full sales price for a new car up-front is not financially possible for some people. For other car buyers, it is not an ideal way to spend a bulk of the cash in their accounts. But how does one avoid Overpaying Auto Loan?

Overpaying Auto Loan

Your car loan payment will affect your budget for several years or longer. In addition, the interest charges that you pay on your loan can inflate the total cost that you pay for your vehicle when all things are considered. By focusing your attention on a few helpful tips, you can keep your financing costs for a car loan as low as possible.

Investing in a vehicle is like investing in a property because it is inexpensive. Most of the time, when we can’t afford to have it by cash, we turn to loans. However, what’s frustrating is that we owe more on the car loan than the worth of the car itself, and you don’t want to be Overpaying Auto Loan. You could think that you had a good deal but in reality, you are overpaying car loan because you haven’t understood the principles.

The problem is, when people are looking for a car, they tend to concentrate on the model and the type of vehicle they want instead of the loan that they get to pay for it. However, overlooking these things may even cost you thousands of dollars more, and you won’t want to make this kind of mistake

When people go car shopping, they usually focus on the vehicle they want — not the loan that will pay for it. But good financing is the bedrock of a solid car deal, and missteps could cost you thousands. While consumers know that low-interest rates are desirable, there are other critical factors to consider when securing a car loan or dealership financing. Car-buying experts and industry insiders recommend key strategies to prevent costly mistakes.

Review and Fix Your Credit Score

One of the most significant factors that will affect your financing costs for a car loan is your credit rating. Auto lenders use a tiered rating system, and borrowers with a better credit rating may qualify for a lower score. In some cases, the difference between the highest and lowest tiers of interest rates can be substantial. A smart idea is to review your credit report before you apply. You are entitled to one free copy of your credit report from each of the three primary credit bureaus each year.

Understand that the tiers also vary based on your loan amount and whether you are buying a new or used car. While credit scores are important, understanding all factors impacting the tier structure is helpful when you want to set up the most affordable car loan and not Overpaying Auto Loan.

When you review your credit reports, focus on finding information that is being reported in error. These things could be negatively affecting your credit scores, and you could easily fix these issues in many cases. If you notice that your scores are lower than you would like them to be because of other legitimate factors, you can spend a few months addressing these issues. For example, you could pay down high credit card balances, pay off an outstanding collection account balance and more.

Understand the Impact of Your Loan Term

Another factor that will affect your interest rate on a car loan is the loan term that you select. Loan terms usually range between 36 and 72 months, but you may find some loan programs that have longer or shorter terms than this. A longer loan term will create more affordable payments. However, the interest rate is usually higher with a longer loan term.

Because the interest rate is higher and you are paying on the loan for a longer period of time, these loans could cost you substantially more in interest charges over the life of the loan than a short-term loan.

While you want to choose a shorter term for your car loan to keep the overall cost of financing as low as possible, you also need the payment to be affordable. A good rule of thumb is to aim for a 48-month loan term to prevent Overpaying Auto Loan. If the vehicle’s payment is too high with this term, consider making a larger down payment or buying a more affordable car.

Find Your Best Financing Deal Before You Shop

When you walk into a dealership, the sales department will pressure you to make an immediate purchase. Some use high-pressure sales tactics, and others have more covert methods. However, you will likely feel the urge to make a purchase on-the-spot.

Rather than walk into a dealership empty-handed and accept any offer that you receive from the financing department provides to you, spend a few minutes shopping for a low-interest rate online. You usually can apply for an online auto loan within a few minutes, and you may receive instant or rapid approval. Pay attention to the interest rate, loan term, and loan fees when comparing offers. Simply print out the pre-qualification letter for the best offer that you found, and bring it with you to the dealership to avoid Overpaying Auto Loan!

Avoid Focusing on the Payment Amount

Regardless of whether you are shopping for a great car loan deal online or you are sitting in the financing office at the dealership, you may be inclined to focus your attention on the monthly payment. An affordable monthly payment is important, but this is not indicative of which loan offer is the most affordable overall. While you compare the monthly payment amount, also look at the total financing cost.

This information should be fully disclosed to you up-front before you sign any papers. The best loan to apply for has a lower financing cost and an affordable monthly payment. Remember that the loan amount, interest rate and loan term are all factors in calculating the total financing cost. You can manipulate any of these three factors or all of them if you want to reduce your total financing cost to get a better deal on your car loan.

Ask the Dealership for Their Best Option

With a prequalification letter for the best financing terms that you found in your hand, you can confidently walk into the financing department office. This offer represents the worst-case scenario for financing that you have available. The financing department is tasked with the job of trying to set up an even better deal for you to accept. Essentially, you are telling the financing department to beat the offer that you found on your own. Remember that all factors should be analyzed when you compare offers rather than just the monthly payment amount.

Avoid Long Loan Terms

The average car loan term has stretched to an all-time high of 69.3 months, an increase of 6.8 percent from five years ago. But long terms can put borrowers at risk of becoming upside-down on their loan meaning they’ll owe more than the car is worth and paying more in interest over the life of the loan. This will help prevent Overpaying Auto Loan.

While you can get loans up to 84 months, the recommended idea is financing a new car for no longer than 60 months. Used car loans shouldn’t be longer than 36 months. This is essential to not Overpaying Auto Loan!

Shop Your Best Rate

If you don’t know your credit score and what interest rate you qualify for, how can you know you’re getting the best deal on financing? Applying to multiple auto lenders lets you compare offers to ensure you get the most competitive rate either from an outside lender, like a bank, credit union or online lender or from the dealer.

With dealership financing, those with excellent credit can assume they’ll qualify for the manufacturer’s best terms. However, buyers with mid-tier credit are at risk of having a dealer mark up their interest rate.

To prevent this, I always suggest that you apply for financing with your bank or credit union before you go car shopping. Then let the dealer try to get you a better rate than you already have.”

Don’t Focus Only On Monthly Payments

Whether you choose an outside loan or dealership financing, it’s natural to want to have a low monthly payment. But beyond the extra interest costs, you might incur with a longer term, focusing solely on monthly payments can leave you vulnerable in other ways. Some salespeople at the dealership may ask what monthly payment you want and then covertly inflate the sales price. If you become a monthly payment buyer, you’ve lost control of the deal. You may overpay for the car, with the extra cost hidden in other areas, like extended warranties or extra insurance policies but you do not need to be Overpaying Auto Loan!

Watch Out for Surprise Fees

Make sure you understand your lender’s fees. Banks, credit unions and online lenders may charge origination fees. These are often rolled into the total loan amount, so you can simply compare offers based on the payment and interest rate. Occasionally lenders also may charge prepayment fees. And loans through outside lenders and dealerships often assess late fees.

At the dealership, some salespeople may quote a low sales price but then tack on additional fees (or pricey car accessories) to boost their profit. It is a good practice to ask the finance manager to explain any extra fees before signing your contract.

For reference, in most states, car buyers pay for the car, sales tax, a documentation fee, and registration costs. Shoppers can compare dealerships by emailing to ask for a breakdown of fees before they agree to a deal

Review Vital Loan Terms

Loan contracts are binding, so review the terms carefully. Whether you borrow online or at the dealer, it will be hard — or impossible — to “unwind” the deal. Before signing, review the interest rate, loan term, monthly payment, and any fees to avoid Overpaying Auto Loan.

When shopping outside auto loans, also be aware of any restrictions. Some lenders won’t finance certain car makes or models, or their offer may apply only at specific dealerships.

At the dealership, most sales contracts are boilerplate documents reviewed and approved by the state. But “if reading every word is important to you, ask for a blank one to read as you are waiting for the F&I (finance and insurance) manager to complete your paperwork.”

Instead of scrutinizing the verbiage, focus on the numbers in the sales contract. If you’re properly prepared, there shouldn’t be any ugly surprises.


Getting a Car loan is not easy most times and giving out your hard earned money to lenders will cause you pains if you don’t follow the principles. You will end up overpaying lenders if you don’t understand how the car loan processes work. You need to know and understand every single detail of your loan. You need to make sure that you go through each and every term thoroughly and carefully. It is not possible to undo it as soon as you have already signed the contract. Before you even leave your signature, make sure everything is crystal clear. If something confuses you, do not hesitate to ask. Read every single word in the contract. Also, focus on the figures in the sales contract.  

It is important that you understand all of the fees included in your loan. They may be rolled all together in one loan and you have to really read and watch out for these fees. At first, you may be given a low price and you will be surprised at the end that there are actually more fees. And these are not discussed well at times because these are intended to boost the lender’s profit

By being knowledgeable and familiar with everything included in the paper that you are signing, there is nothing that you shouldn’t worry about Overpaying Auto Loan. It is all but a matter of knowing and understanding, to make sure that you are getting your money’s worth and that the vehicle you are purchasing is worth every single penny.

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