10 common car loan mistakes that cost you money

With new and used car prices continuing to rise, it’s more important than ever to get the best deal on a car loan that meets your short- and long-term financial goals. A little extra planning could help you strike a better deal on the out-the-door price of a new car. Taking more time to compare auto loan rates along with a few other budget-savvy steps could save you money so you don’t erase the savings negotiated on the purchase price.

1. Not reviewing your finances

Before you start car shopping, ask yourself a few questions about your finances — and answer them honestly.

• How much can I really afford? Take a look at your spending habits to see if there are any avoidable expenses eating up your paycheck. You may need to cut back or eliminate some depending on how much your new car payment is.
• How much of a down payment can I make? A down payment will help you negotiate a lower price and reduce the amount you need to finance. Use an auto loan calculator to see how a large down payment impacts your total cost.
• Can I cover maintenance and emergencies? Oil changes, tire rotations, new brakes or a late-night breakdown are necessary costs that come with owning a car. Make sure your budget can handle them without using a credit card or taking out an emergency loan.
• How much will my insurance be? If you know the make and model of the car you plan to get, find out how much the insurance will be. Auto insurance premiums have been on the rise in the past few years, and if you haven’t bought a car recently, the premium sticker shock may surprise you.
• What is my credit score? Auto loan lenders are more likely to approve your application and extend low interest rates if you have excellent credit. If you have bad credit, you may have a more difficult time finding approval, but you may still be able to access bad credit auto loans. 

2. Not shopping around

Dealership financing can be an easy and convenient way to get a car loan, but dealers often mark their rates up by a few percentage points. Before heading onto the high-pressure sales floor, get a few auto loan quotes from banks or credit unions. This can help you haggle with the dealership’s finance department.  

If your credit score is fair or bad — or if you’re buying an older, high-mileage used car — try online lenders or a marketplace lender like Bankrate. You can get several quotes from multiple lenders to see if the payments are affordable. 

Keep in mind that prequalification is different from auto loan preapproval. Ideally, you should apply for preapproval with lenders. This will allow you to negotiate with the dealership more effectively as a cash buyer. Just be prepared for the dealership to withhold price discounts or extra perks if you don’t use their in-house lender. 

3. Not deciding between new or used

Don’t make the mistake of strolling onto a new car dealership lot unless you know you can handle the higher monthly payment. With vehicles continuing to become more expensive, it’s crucial to determine whether you want a new or used car so you can set a realistic budget.

The price difference between a new and used car could drive your decision between the two. Data from March shows that new cars had an average cost of $47,462, according to Kelley Blue Book. Used car listings for the same period were more than $20,000 lower, averaging just over $25,500. 

This leads to a big difference in the average monthly car payment between new and used. You could save nearly $200 per month by buying used — the average used car monthly payment is $525 compared to $742 for new cars. If you want the benefits of a new car without the debt and depreciation that comes with it, consider a certified pre-owned (CPO) car instead. 

4. Focusing on the monthly payment

Although the monthly payment on your car loan is important — and you should know in advance how much car you can afford each month — it shouldn’t be the basis of your price negotiation.

Once you tell a dealer how much you can afford monthly, you will likely get some sales spin about all the creative ways to get you to that payment. That may include choosing a longer term that increases the odds you could end up upside down on your loan. 

To avoid this, negotiate the vehicle’s purchase price and any dealer fees instead of focusing on the monthly payment. Counter back any questions about payment with questions about lowering the price. 

5. Applying with a low credit score

Your creditworthiness determines your interest rate, and a high credit score can help you qualify for a better auto loan interest rate than someone with a low score. Knocking off just one percentage point of interest from a $45,000 car loan over 60 months could save hundreds of dollars in interest paid over the life of the loan.

Knowing your credit score ahead of time will put you in the driver’s seat in terms of negotiation. With it, you will know what rate you can expect — and if the dealer is trying to overcharge you or lie about what you qualify for. If it needs some work, you can pay off credit card debt, avoid opening new accounts and pay everything on time. 

The average auto loan interest rate for a new car was 6.35 percent in the fourth quarter of 2024, according to data from Experian. For a used car, the average jumped to 11.62 percent — though both new and used cars are more expensive for a borrower with bad credit.

6. Not choosing the right term length

Auto loan terms typically range from 24 to 84 months. Longer terms may offer lower payments, but the longer you spend repaying your loan, the more interest you’ll pay. Some lenders may also charge a higher interest rate if you choose an extended repayment period because of the greater risk you’ll become upside-down on the loan.

To decide how long you should spend paying back your auto loan, consider your priorities. For example, if you are the type of driver interested in getting behind the wheel of a new vehicle every few months, being trapped in a long-term loan might not be right for you. On the other hand, if you have a limited budget, a longer term might be the only way you can afford your car.

7. Not making a down payment 

Experts recommend you make a down payment of at least 20 percent on a new or used car loan. The benefit of a down payment is that is shows the lender you’re financially prepared for the purchase. It may even motivate the sales rep to negotiate for a lower price or discounted add-ons. 

The opposite is also true. Offering no down payment, or a low down payment, may tell the dealer your finances aren’t in good shape. The dealer may choose to charge you a higher rate on your loan, and it could increase the chance of ending up upside down on your car loan with a vehicle that is worth less than what you owe. 

8. Financing add-ons and taxes

Dealerships profit from vehicle add-ons — especially aftermarket products sold through the finance and insurance office like extended warranties and gap insurance. Check if the add-on, warranty or product is available outside the dealership for less. 

Buying from a third party is often cheaper for aftermarket products, especially if you wind up wrapping them into your financing. This will mean spending more over the long haul since you will be charged interest. If there is an add-on you truly want, pay for it out-of-pocket. Question every fee you don’t understand to avoid unnecessary additions to your purchase price.

9. Rolling negative equity forward

Being upside down on a car loan is when you owe more on your car than it is worth. Lenders may allow you to roll over that negative equity into a new loan, but it’s not a smart financial move. If you choose to do so, you will pay interest on both your current and previous car. 

Instead of rolling negative equity into your new loan, try paying off your old auto loan before taking out the new one. You can also pay off your negative equity upfront to the dealer to avoid paying excess interest.

10. Not reading the fine print

The pressure to make a decision can lead inexperienced car buyers to make hasty decisions that result in buying an affordable car. Read all the fine print in your car loan paperwork, look at each line of your car’s price estimate and check the insurance coverage so you know how you’re protected — and how much it will cost. 

You may also want to look into the Consumer Reports maintenance and repair costs for the vehicle so you have an idea of what the average owner is spending. Similarly, Kelley Blue Book and Edmunds have similar five-year cost-to-own estimates. If you don’t understand something in your loan paperwork or the purchase agreement, don’t sign. If you’re feeling pressured, you have every right to walk away.

Bottom line

The key to avoiding car loan mistakes is planning ahead of time and knowing what you want before you shop. This means negotiating the monthly payment, knowing your credit score, choosing the right term length, being aware of add-on costs and avoiding rolling over negative equity. Keep potential mistakes in mind while you negotiate, and with luck, you will reduce the odds of buying a car you can’t afford or compromising on other financial goals.