Buying a new automobile is a major financial decision and not one you should take lightly. There are many hidden cost in auto loans so we decided to put together these tips which should help you make a more informed decision. Let’s take a look at all of the different variables involved.
The interest rate you are being charged plays a key role in how much you have to pay back. The majority of drives don’t look at the Interest rate they simply look at the monthly payment but that is dangerous thinking. Some lenders will give you what appears to be a lower rate but stretches the tenure of the loan, the longer it takes to repay the loan the more it costs you. This is one of the sneakiest hidden costs in auto loans but it is not the only one.
Dealing with the Taxman
The government is very happy you purchased a vehicle, they want to celebrate by charging you a percentage of the purchase price of the vehicle plus other taxes renamed fees i.e. environmental preservation fees or something similar. There are tax rebates when you purchase a hybrid vehicle but these rebates when you look at what is involved in claiming them is a waste of time.
License, Registration and Insurance
The government likes getting sales tax but they also need a little extra so they charge extra for licensing and registration and this comes out of your pocket. Another major hassle is the cost of insurance which also levies sales tax on you. Don’t feel discouraged this is just a fact of life but you are beginning to see why we need to highlight all of the hidden costs in auto loan.
Bait And Switch Financing
There are car dealerships that will tell you on the phone they can get you financing they just need to “run the numbers”. If you have weak or bad credit it will come up when the car dealership runs your credit check. While reading this credit report the dealership will be able to see how many other dealers you went to. This information is going to let the car dealer know whether you have any lenders lined up. If you are not able to get a conventional auto loan they will jack up the interest rates or ask you to get a co-signer. They won’t tell you this over the phone though, you only receive this “bad news” after you have gone for a test drive and found the car you truly love. Once you have found the car you really like and “want it bad” the dealership has you right where they want you in a manner of speaking.
Teaser Interest Rates
You’ve seen the advertisements, auto financing with unreal interest rates and in fine print it will say “on approved credit” but they never say what “approved credit” is. This is an approach used by car dealerships to get you into their shop and make you fall in love with a vehicle. Unless you have fantastic credit (780 FICO or higher) the dealer will try to increase the interest rate using the justification that since your credit is bruised, blemished or downright horrible. When the dealership increases this interest rate the difference between what the lender quoted them and what they charged you is pure profit and it is usually legal even if they do not disclose their markup. This is one of the most common and expensive hidden costs in auto loan.
Underwater Auto Financing
The term “underwater” is sometimes used to describe negative equity. Negative equity is when you own more on the loan than what the vehicle is worth. If your current vehicle is worth less than what you owe and you want to purchase a new automobile then you need to secure financing to “buyout” the current automobile loan and finance the purchase of the newer vehicle. This type of financing is very expensive since most lenders will never give a loan for more than what the vehicle is worth.
The extended warranty is one of the most expensive hidden costs in auto loan. These warranties are usually invoices as a lump sum fee which is bundled into the automobile loan. People think they need a warranty to protect themselves but these warranties usually do not cover the most important components of the vehicle or the manufacturer warranty that comes with the vehicle is sufficient.
How to Avoid These Inflated Automobile Costs
Now that you know about these inflated automobile costs you should follow these points.
- Check your credit to make sure the score is high
- Shop around for auto financing. You are not obligated to take the financing from the dealer and in some cases having your financing in approved by another lender will give you negotiating power when haggling with the dealer.
- Never make rash decisions. Some people give in to their emotions and then regret it when they are overpaying needlessly. If you take your time and do your research you can avoid the hidden costs in auto loans.