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7 Hidden Costs Of Getting A Car Loan

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By Sarita Harbor / GOBankingRates

Unless you’ve recently won the lottery or have been budgeting diligently for years, you will likely need a car loan before heading out on your new car. And while you know the price of your new car, your down payment amount, and your monthly loan installments, if you are considering taking out a loan, you might be surprised at the less obvious cost of a car loan.

Understanding hidden fees when taking out a car loan for your next car will help you identify them and either avoid or minimize these costs when comparing car loans.

Here are seven less obvious costs to look out for when taking out a car loan.

This article was originally published by GOBankingRates.

Increased interest rate on auto loans


One of the less obvious costs of buying a new car is the higher interest rates often associated with car dealer financing. According to the Consumer Financial Protection Bureau, car dealers sometimes add their own fee by adding a higher interest rate on top of the car loans, increasing the annual percentage. Instead of getting hit by that more expensive loan from a dealership at a great APR, and depending on your creditworthiness, you may be able to get pre-approved a car loan from a credit union before you buy a car.

Credit unions typically charge 0.5 to 1 percent less than car dealerships for financing, as long as you have acceptable credit risk. If you think you might want to go for dealer financing, strengthen your negotiating position by obtaining pre-approval for a car loan from a credit union or other financial institution before negotiating with the dealer.

Prepayment penalty


Even though you may need a car loan to buy a new car, there is always the possibility that you will want to pay off your loan early, either with cash or by refinancing it into a low-interest loan. In this case, watch out for hidden costs known as prepayment penalties. This is a fee to repay a loan before the term expires. Not all auto loans have prepayment penalties – ask your lender to point them out. You may even be able to reduce this penalty as part of your car loan negotiation.

CAP insurance


Guaranteed car coverage is another expense that you may not be aware of when financing a car. GAP insurance is an optional insurance that pays the difference between what your auto insurer pays and the rest of your car loan if your car is damaged, totaled or stolen.

The GAP insurance can be taken out with the car dealer, but also with a third-party finance company or a general or GAP-exclusive car insurance company. It is wise to shop around before taking out insurance because when it is bundled with the car loan, the GAP insurance increases interest payments.

Opportunity costs


When it comes to business and money, opportunity cost refers to the financial opportunity that you are giving up by spending your money in a different way. So, with a car loan, opportunity cost is what you can’t spend your money on because you are making monthly payments on a car loan. Depending on your financial situation, this may mean that you cannot build up your long-term savings as quickly, pay off your other debts as quickly, or make other purchases.

These hidden costs add up quickly, both for your household and for the country. US auto loans outstanding reached $ 1 trillion for the first time in the second quarter of 2015, according to the Wall Street Journal. That’s $ 1 trillion that Americans don’t spend on retirement planning or investing in other sectors.

Extended vehicle warranty


Extended vehicle warranties or service contracts cover the cost of expensive electrical or mechanical vehicle problems that are not covered by a manufacturer’s warranty. Car dealers who offer financing also usually offer extended vehicle warranties, which can add to the cost of your car loan and monthly payment. However, these guarantees are not required, so think carefully before agreeing to one. If you opt for an extended vehicle warranty, try negotiating the price or paying for the warranty with cash. Or, if you are getting financing from a credit union, ask if they offer these guarantees as the costs through a credit union may be lower.

Negative equity financing


If you already have a car loan and a vehicle and you have more debt on your car loan than your vehicle is worth, then you have what is known as negative equity. And when you buy a new car with new financing, you may come across something called negative equity financing, the new vehicle.

So, in addition to paying interest on the loan on your new vehicle, you are paying interest on what you owe on the vehicle you trade-in. However, this increases the cost of taking out a car loan, according to JD Power and Associates, about a third of car owners who traded their cars this year have negative equity as of 2016.

Credit Insurance Protection


You may never have heard of credit insurance, but this optional insurance that covers your car payments in certain situations can also add to your car loan costs.

Typical situations that credit insurance protection could cover are:

  • Credit life insurance to repay the entire loan in the event of death
  • Disability or accident and health insurance to cover car loan payments if you have a qualified injury or illness and are unable to work while on your loan
  • Involuntary loss of income or unemployment insurance that pays your monthly payment for a certain number of months in the event that you lose your job through no fault of your own

Credit insurance protection can be quite expensive. Before you make a commitment, do some research and get quotes from a variety of sources. And don’t forget to check your existing insurance policies as they may already have coverage for these situations.

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These hidden fees and charges are costs that anyone financing a car will deal with, but few people actually talk about them or factor them into the actual cost of borrowing to buy a car. Although these costs can be hidden in a car loan payment, knowing what to look for and what questions to ask will reduce your chances of being surprised by unintended fees when buying your next car loan.

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