How to Avoid Common Auto Loan Mistakes and Save Big

Buying a car is an exciting experience, but the road to financing can be a bit bumpy if you're not careful. Getting an auto loan isn’t just about choosing the right car, it’s about making sure your loan terms fit your budget and your long-term financial goals. In this guide, we’ll help you avoid some of the most common mistakes car buyers make, so you can drive away with confidence.

7 Common Loan Mistakes When Applying for a Car Loan

Applying for an auto loan might seem straightforward, but there are several pitfalls that can make the process more challenging or costlier than it needs to be. From overlooking better loan rates to underestimating hidden costs, these mistakes can impact your budget and your long-term financial wellbeing.

Being aware of the most frequent missteps, like accepting the first offer you receive, focusing only on monthly payments instead of the overall loan amount, or skipping important protections such as GAP insurance, will help you approach your car loan with confidence and make more informed decisions.

Let’s break down these common errors, so you can avoid unnecessary stress and get the best value for your hard earned money.

1. Shopping Around for the Best Auto Loan Rates

Many buyers make the mistake of settling for the first loan they’re offered. But just like any purchase, you want to make sure you're getting the best deal available. A small difference in interest rates can mean paying hundreds or even thousands more over the life of the loan.

What to do instead: Shop around and compare rates from different lenders, including credit unions and banks. Getting pre-approved for an auto loan can help you negotiate the best deal and avoid the pressure of on-the-spot dealer financing.

2. Focusing Only on Monthly Payments

It’s easy to get caught up in the idea of securing a low monthly payment, but what really matters is the overall cost of the loan. Sometimes, extending the term of the loan to lower monthly payments can end up costing you more in the long run due to higher interest.

What to do instead: Look at the total cost of the loan, not just the monthly payment. A longer loan term may seem more affordable each month, but you might end up paying more interest over time. If possible, aim for a shorter term to save on interest.

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3. Neglecting to Factor in Additional Costs

When you’re thinking about how much your car will cost, don’t forget the other expenses that come along with purchasing a vehicle. There are taxes, title fees, dealer add-ons, and insurance premiums that can quickly add up and increase the total cost of your car.

What to do instead: Make sure you're accounting for all the extra costs involved in purchasing a car, including taxes, registration fees, and any add-ons the dealer might offer. This ensures you're not caught off guard when it’s time to sign the paperwork.

4. Overlooking the Importance of a Down Payment

A down payment is more than just a chunk of cash you put down upfront, it’s a smart way to reduce the amount you borrow and keep your loan payments lower. While it’s not always required, putting money down can help you avoid “negative equity” (owing more than the car is worth).

What to do instead: Whenever possible, make a down payment. Even a small one can reduce your loan amount, lower your monthly payments, and give you more financial flexibility in the future. It also helps protect you if the car’s value drops faster than the loan balance.

5. Not Considering GAP Insurance

When it comes to protecting your investment, many car buyers overlook the importance of GAP insurance. If your car is totaled in an accident and you owe more than it's worth, regular insurance won’t cover the gap between the vehicle’s value and what you still owe. This is where GAP insurance can step in.

Why it matters: GAP insurance is especially important if you’re buying a new car, have a long loan term, made a small down payment, or if you're leasing. It protects you from the financial strain of owing more than your car is worth if the worst happens.

While GAP insurance is a smart choice for some, it isn’t necessary for everyone. The need for it depends on your loan terms, the car’s value, and how much you’ve put down. But if it’s right for you, it can save you from a major financial setback.

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6. Relying Too Heavily on Dealer Financing

Some buyers think the best place to get an auto loan is right at the dealership. While dealership financing can be convenient, it may not always offer the best rates or terms. Dealers often work with specific lenders, and they may not offer you the best deal for your financial situation.

What to do instead: Consider getting pre-approved for an auto loan before you visit the dealership. This gives you a clear idea of your budget and ensures that you’re not swayed by dealer financing offers that might not be in your best interest.

7. Not Understanding the Impact of Your Credit Score

Your credit score plays a significant role in determining the interest rate you'll be offered on your auto loan. A higher score can lead to a lower rate, saving you money over the life of the loan, while a lower score can mean paying more in interest.

What to do instead: Check your credit score before applying for an auto loan. If your score is lower than you’d like, consider working with a co-signer or taking steps to improve your credit before applying.

Smarter Auto Loan Decisions Start Here

By avoiding these common mistakes, you can ensure that you’re making a smart financial decision when it comes to your auto loan. Remember to shop around, be aware of the total cost, and protect yourself with options like GAP insurance if it makes sense for your situation.

At First Alliance Credit Union, we’re committed to helping you make smart choices with competitive rates, flexible terms, and expert guidance on everything from auto loans to insurance options. Visit First Alliance Credit Union's website today to learn more about your options and get pre-approved for an auto loan.

Make your next car purchase a smart one. Get pre-approved online now!