The 10 Worst Car Financing Mistakes You Can Make

It's time to buy a car. In an ideal world, purchasing a vehicle without a loan (and getting a good deal on it) saves you the most money. However, over 80% of people buying a new car finance their purchase. That means you need to be savvy to reduce the risk of financial disaster.

Failing to consider all of the options when choosing a loan could mean making a decision that creates 3 to 5 years of financially draining loan payments on a vehicle that may not be worth it. When it comes to money moves for car owners, buying wisely makes your purchase more affordable over the long term.

To make smarter moves, avoid these most common — yet bad — ways to finance a car purchase.

A high-interest rate loan is the only option for some people, especially those with poor credit scores. Yet, high interest rates directly impact how much you spend to buy that vehicle, and they can drive up monthly payments.

Alternatively, carefully compare loan options and seek a lender who can offer you a better rate. They may be willing to do so if you have a cosigner or a larger down payment.

The longer a car loan is, the more time there is for interest to build on the balance, driving up the cost of a vehicle. If you choose an auto loan with an extended term of 72 or 84 months, you'll get a lower monthly payment but a much higher long-term cost.

Let's say you select a 60-month term with an interest rate of 5.54% on a $30,000 loan to buy a car. Your monthly payment would be about $574. However, you'll pay $4,415 in interest on top of the $30,000 repayment.

If you selected the same $30,000 loan and interest rate with an 84-month term, you'll pay $432 per month, for a total interest of $6,260, making the vehicle more expensive.

Putting a down payment on a purchase is always a good idea, but putting down a large deposit on a lease is not as beneficial. It could mean a lower monthly payment. The drawback is that you are wasting money that could be invested otherwise or used to pay off the car loan sooner.

Instead, find the sweet spot where your monthly payment fits your budget, and you do not spend more than you should on the least expensive items.

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Many people like to lease their vehicles because it often means a lower monthly payment. However, leasing becomes too expensive if you lease the car when you will ultimately buy one.

That's because mileage restrictions and the inability to build equity in the vehicle limit your financial health. The alternative option is to buy instead. Choose a loan term that fits your monthly budget needs and then work to pay off that loan as quickly as possible.

It's always possible that you end up having negative equity in a car. That means you owe more on the loan than the vehicle is now worth (that's one of the most common drawbacks of long loan terms).

Rolling over that equity into the purchase of a new loan only extends the time you'll have to repay the loan, and it could drive up your monthly payment. Instead, consider selling the first car to recoup as much value as possible. Then, use that money to purchase a new vehicle.

Chances are good the dealership will encourage you to purchase through their financing department and may even promise to beat the competition. Sometimes, they can offer a lower interest rate or better terms, but you will not know that until you compare lenders.

Dealer-arranged financing is attractive, especially if you have poor credit and need help finding a lender. However, these loans have higher interest rates than those you could get alone. The alternative is to shop outside the dealership to find the best rates possible.

There's certainly something nice about being a vehicle's first owner, but buying a brand-new car involves several costly concerns.

First, as soon as you roll that vehicle off the lot, it is no longer new, leading to significant depreciation and instant negative equity. Second, when you pay off the loan, you may not have a valuable vehicle to trade in for a new one.

Before you buy a new car, consider the older models available. Those with lower mileage may be a better value.

When choosing a car loan, ensure there is no prepayment penalty. Then, pay more towards your car loan every month.

You can do this in various ways, such as paying extra on top of what you owe each month or making biweekly payments (you'll end up with a whole extra payment when you do). This way, you save money by paying off the loan faster.

Dealer extras are available, and they can certainly seem like a good idea.

These include extended warranties, gap insurance, VIN etching, or expensive maintenance packages. If you want these extras, pay cash out-of-pocket rather than wrapping them into the loan and driving up your costs.

More so, consider the value of any of those features and whether it is worth the investment.

Dealerships, manufacturers, and even lenders offer discounts and promotions frequently, and as they do, they save you money. They are not always publicized, though, or when you arrive at the dealership, there's no mention of the discount you saw advertised.

Ask for the end-of-year pricing, the manufacturing rebate offers, and a simple lowering of the interest rate they are charging you. If they will not budge on the interest rate, ask for a lower sale price. Just asking doesn't hurt, but it can save you money.

As you seek a new car loan to buy a vehicle that fits your needs, do not forget to look at other ways to reduce costs. Boost your credit score by checking your credit report, paying down some of your debt, and making timely payments. That could lead to a lower score.

Don't forget to consider car insurance costs, too. Ask your insurer what they expect the insurance policy for the car you are considering would cost. Then, ask them how you can save on car insurance with your current insurer and compare your options to save even more.