Car Loan Mistakes You Can Avoid
Taking out a car loan is really exciting. Getting your new car, even better. Sometimes, things can go wrong. Here are some common car loan mistakes you can avoid.
Car Loan Mistake: Running Costs
It’s easy to forget about running costs (whether intentional or not) when looking at ads. Many people forget that it can really add up.
- And, of course, fuel.
Not to mention, any modifications you may have planned. These are all in addition to actually making the scheduled loan repayments too. And, of course, living costs.
Make sure to crunch the numbers and choose a car that matches your lifestyle and financial situation.
Car Loan Mistake: Enquiries
Some people don’t realise that with each formal car loan enquiry, your credit score is affected. A formal enquiry means asking a lending institution (eg. a bank) if they’ll lend you money by going through the whole process. This can be online, over the phone or in person.
Some people try to shop around to get the best rate when it actually hurts their credit history. Formal enquiries are recorded on a borrower’s credit report whether they get approved for the loan or not, or whether they accept or not.
The solution: Talk to a broker or ask for a quick quote. This will allow you to get a clear idea of what loan amounts, rates and repayments look like without affecting your credit report.
Car Loan Mistake: Bank Statements
Another part of a loan that’s often overlooked. More often than not, your bank statements will be scrutinised during the application process. Lending institutions want to see a clean banking history. This means:
No or minimal gambling. If you use gambling apps or online gambling services, the transaction records can display in bank statements. Some lending institutions see this as a negative.
Minimal large or frequent cash withdrawals. When a potential borrower withdraws large, unexplained amounts of money, lenders can again see it as a negative when calculating risk.
Paying off other loans. If you have other loans that you’re paying off, they will likely be evident in bank statements. Lenders struggle to add more debt to borrowers as they don’t want to see people in financial hardship.
The solution: In the months leading up to taking out a loan, make sure your bank statements are as clean as possible.
Car Loan Mistake: Private Sellers
Some people think that you can only take out a loan if you buy cars from car dealers. This is not the case.
Car loans cover vehicles from dealers and private sellers. This means you’ll be able to check out cars on GumTree, Facebook and anywhere else online or even from a friend or family member.
Most secured car loans work by transferring funds directly from a lender to a vendor or vehicle seller. In other words, the buyer of the vehicle (loan borrower) won’t actually see the fund in their bank account.
Borrowers are typically pre-approved for a specific make, model (or several) and amount, then can go car shopping. Upon agreeing with a seller on a price, the loan amount is adjusted correctly.
Car Loan Mistake: Interest Rate Tunnel Vision
Everybody knows that interest rates are, in a nutshell, the ‘price’ of a loan. But they’re not the be all and end all of loans.
Make sure to look at the whole picture. Check the fees and total price breakdown which is always provided prior to accepting a loan.
Sometimes, a loan with a slightly higher interest rate than a friend’s loan might offer more favourable conditions for your circumstances.
Car Loan Mistake: Refinancing
This option is not well known to most borrowers, but often it can provide a good solution. It means taking out another loan to pay off an existing loan. This may seem strange at first, but it can save borrowers’ money.
If you take out a loan, after a period of time, you might be eligible for refinancing. A new loan may offer lower scheduled repayments over a longer loan term leaving you with more cash each pay cycle. You may also be able to access lower interest rates.
Talk to a broker or do your own research to find out if refinancing is favourable for your financial situation.
At the End of the Day
Did you know that around 90% of new cars on Australian roads are purchased under finance? Nearly every Australian relies on credit (a loan) at some point in their lives. Car loan can really be an exciting thing – if you avoid car loan mistakes.
Make sure to take the above into consideration and do your research without rushing into things.
Other information that may be useful:
- How to get a car loan after repossession.
- Ways to avoid a bad car loan.
- Know when to trade in or sell your car.
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