Seven mistakes to avoid when getting your next car loan

Will Hamilton writes about smart money management, financial literacy, and lifestyle topics.

Got your eye on a new set of wheels? If you plan on financing your purchase, it's important to research your options before committing to a loan. Don't get side-tracked by the finance professional or salesperson - some are trained to convince you to spend more money. Here are seven mistakes you don't want to make when getting your next car loan.

1. Getting Sucked Into an Extended Warranty
Extended warranties on cars are largely overrated, and there are statistics to back that up. According to a survey conducted by Consumer Reports, 55% of car owners who purchased the warranty never used it for repairs. However, if you think you'll use the extended warranty, or you just want it for the peace of mind, do your research to find out exactly what it covers and how long the coverage lasts.

2. Negotiating the Monthly Payment
Your monthly payment can be deceiving - a lower payment doesn't always mean you'll pay less for the car. In fact, if you negotiate a lower monthly payment by extending the loan's pay-off time, you'll probably end up paying significantly more. Instead, negotiate the total purchase price of the car and the interest rate. You can use our vehicle payment calculator to determine how much your monthly payments will be.

3. Failing to Research Interest Rates
Interest rates vary between auto loan providers, so do your homework. Start with your current bank, but branch out and check local credit unions as well. Don't simply agree to finance through the dealership - you might end up paying more than necessary - but do ask the dealer what rates are being offered. Sometimes dealerships offer stellar rates to help move cars.

To research interest rates for auto loans online, check out Bankrate.com. Once you find the lowest rate, go ahead and get pre-approved. This takes some of the hassle out of the financing process.

4. Not Knowing Your Credit Score
If you don't know your credit score before you walk into the financing office, the finance person has the upper-hand. Your credit score has a significant effect on the interest rate you pay, so make sure you know where you stand. Go to the website Credit Karma to get a free credit score estimate, or if you want a 100% accurate credit score, pay $4.95 at the MyFICO website.

5. Choosing the Wrong Incentive
During many car sales, you have the option to take a cash back rebate - an amount discounted from the car's purchase price - or a more attractive interest rate. There's no right or wrong answer - sometimes one offer is simply better than the other - so run the numbers on both to make the best decision.

6. Needlessly Agreeing to Extras
Don't be surprised if you're offered a few extras, such as fabric protection or paint sealant. Don't take the bait. Usually you can purchase these aftermarket, pay for them out of pocket, and avoid wrapping them into your loan. This means you won't end up paying interest on extras.

7. Not Putting Enough Money Down
The best way to reduce your overall loan payment is to make a large down payment. As long as you have a few months to plan your car purchase, go ahead start saving money in advance. Once you have a few thousand dollars set aside, go ahead and make your purchase.

How have you scored a great car loan?

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • MMI is rated as “Excellent” (4.8/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • MMI is a member of the Consumer Federation of America (CFA), an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.