Used car loan: Common mistakes to avoid

used car loan

Buying a used car is a smart financial decision and one of its key benefits is the significant savings it offers over buying a new car. However, if you plan to finance the used car via a loan, hold on a sec, as it is a complex process with a few pitfalls that one must consider beforehand.

KEY TAKEAWAYS

  • Can I get a car loan with a bad credit score?

    Yes, however, you need to look for lenders that specifically deal in bad credit auto loans.
  • I want to get a used car loan. What are the requirements?

    To get a car loan in the Philippines, you need to be of legal age, have a stable source of income, and have a good credit score.
  • How long does a bank take to approve a used car loan in the Philippines?

    If all the requirements are met, a bank usually takes around three to five days to approve a car loan application.
  • This article will serve the purpose of a friend who’ll hold your hand and guide you through common mistakes to avoid while securing a used car loan. Thus helping you make an informed decision and save money in the long run.

    But, first, let us understand used car loans.

    Used car loan: Common mistakes

    Also Read: Pros & cons of refinancing your car loan

    An introduction

     

    Like any other loan, a used car loan is an easy way to own a vehicle wherein the applicant is not required to pay the full amount upfront. But as mentioned above, navigating the used car loan process is not entirely a walk in the park. One must pay careful attention to detail and safeguard oneself from potential traps leading to financial strain.

    Some of the common mistakes a borrower makes include -

    • Not checking the credit score
    • Ignoring pre-approval choices
    • Overlooking total loan cost
    • Neglecting to shop around
    • Focusing solely on monthly payments
    • Underestimating the importance of a down payment
    • Not paying attention to the fine print
    • Not considering the age and condition of the car
    • Failing to consider additional costs

    Let us now understand each of these mistakes in detail along with a few tips to avoid them. Great isn’t it, so let’s get started.

    Also Read: Personal loan or car loan: Finding the right financing option for your car

    #1 Not checking your credit score

    credit score

    It is very important to have a look at your credit score before heading out to apply for a used car loan. Why? Well, lenders use your credit score to determine your loan eligibility and the interest rate that will be offered to you. Note, that a higher credit score will typically result in better loan terms, while a lower score can lead not only to higher interest rates, but strict conditions.

    Tips to avoid this mistake -

    Check your credit report: This one is pretty obvious. Before applying for a loan obtain a copy of your credit report from major credit bureaus.

    Look for errors and get them corrected: Thoroughly check the report and dispute any inaccuracies that may negatively impact your score.
    Improve your score: Before applying for a loan, pay the debts and avoid opening new credit accounts.

    #2 Ignoring pre-approved options

    Not paying heed to the pre-approval process can put the applicant at a disadvantage as they offer a clear understanding of what they can afford and also give them leverage when negotiating with a dealer.

    Tips to avoid this mistake -

    Apply for pre-approval: Make sure to apply for pre-approval with multiple lenders to compare offers.

    Use online tools: Simplify the process via online pre-approval tools.

    #3 Overlooking total loan cost

    If before buying a used car, you are solely looking at the sticker price and thinking that’s it, then you are wrong. It is advisable to take into consideration the total loan cost which includes the car's price along with interest, fees, and other charges. Note, that all these charges together significantly impact the overall expense.

    Tips to avoid this mistake -

    Calculate total cost: To estimate the total loan cost, it is best to use a loan calculator, do remember to factor in the interest rate and fees.

    Compare different loan offers: Compare different loan offers based not just on the interest rate but on the total cost.

    #4 Not shopping around for a used car loan

    Used car loan: Common mistakes

    Many times it has been observed that borrowers accept the first used car loan offer that comes their way, which often proves to be a costly mistake. Why? Well, that’s because there might be several other lenders offering used car loans at better interest rates and loan terms,

    Tips to avoid this mistake -

    Approach multiple lenders: Before making a final decision, always compare loan offers from banks, online lenders, credit unions, etc

    Always negotiate: Do not hesitate to negotiate better terms with the lender, you can do so by leveraging competing offers.

    #5 Focusing only on monthly payments

    While finalising a loan, applicants usually focus on getting an affordable/manageable monthly instalment. Agreed, it is important, however, we’d say it shouldn’t be your only consideration. Why? Because there is more to monthly payments than affordability, for instance, a lower monthly payment will lead to longer loan terms which in turn lead to the borrower paying more interest over time.

    Tips to avoid this mistake -

    Consider loan term: Always remember to balance the loan term and monthly payment in a way that minimises the total interest paid towards the loan.

    Look at the big picture: Ensure that the used car loan fits your overall financial plan and not just your monthly budget.

    #6 Underestimating the importance of a down payment

    Used car loan: Common mistakes

    Today, we’d like all the borrowers to understand the importance of paying a substantial amount as a down payment. Why? Well, it will reduce the overall loan cost along with lowering the loan amount, interest, and monthly payment.

    Tips to avoid this mistake -

    Do save for a down payment: Try saving at least 10-20 per cent of the car’s price for a down payment.

    Consider trade-in option: A borrower can consider trading in his/her current vehicle to increase the down payment amount.

    #7 Not paying attention to the fine print

    Irrespective of the lender, a loan agreement is loaded with complex terms and conditions and therefore, it is advised to thoroughly read and understand all the details. Also, make sure there are no unexplained costs or obligations associated with the loan.

    Tips to avoid this mistake -

    Read the entire agreement: It is advisable to carefully review all loan documents before signing.

    Ask questions: For any point or term that you do not understand, seek clarification without any hesitation.

    #8 Not considering the age & condition of the car

    Used car loan: Common mistakes

    A big mistake that a borrower often falls prey to is not considering the age and condition of the car, as it affects the loan terms. For instance, an aged car may come with a higher interest rate and shorter loan term due to depreciation and potential maintenance issues.

    Tips to avoid this mistake -

    Research the vehicle: Do remember to check the car’s history report and get it inspected by a mechanic.

    Choose wisely: Opt for a used car that balances all three factors - age, condition, and price.

    #9 Failing to consider additional costs

    Used car loan: Common mistakes

    Owning a car not only means making the monthly payments but, it also includes planning for several associated costs like registration, insurance, and other related costs.

    Tips to avoid this mistake -

    Estimate the total ownership costs: Do not forget to factor in insurance, maintenance, registration, and taxes.

    Set aside funds: We’d suggest creating a budget that includes the above-mentioned additional costs to avoid financial strain.

    Bonus tips

    Stay informed: Keep up with the latest loan offers and industry trends.

    Seek professional advice: Consult with financial advisors if you’re unsure about any aspect of the loan process.

    Bottom line

    Securing a used car loan is a simple process given that you have avoided the common mistakes which a browser commonly falls prey to. Just by checking your credit score, getting pre-approval, understanding the total loan cost, shopping around for the best deal, balancing monthly payments with loan terms, making a substantial down payment, reading the fine print, considering the car's age and condition, and budgeting for additional costs, you can ensure a smooth and financially sound car buying experience.

    Happy car shopping!

    Also Read: Important financial terms a car buyer must know

     

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