If you haven’t won the lottery or have been budgeting diligently for years, you will likely need a car loan before buying a new car. And while you know the new car price, down payment amount, and monthly loan installments, you may be surprised at the less obvious costs associated with a car loan. Understanding these eight hidden costs will help you identify and avoid them when taking out a car loan.
The interest rate
The interest rate is the most important factor in answering the question “How many cars can I afford?” Dealer financing can cost you more than a bank because the dealer may charge a fee in addition to the interest rate the lender receives You charged. On the other hand, you may be able to negotiate car loan rates with the dealer.
With good credit, you can buy a better auto loan rate from a credit union or bank before you go to the dealer. You will have a better negotiating position with the dealer when you have pre-approved a low-interest car loan. Use a car loan calculator to compare loan rates and terms.
If you trade in your current car for a shiny new ride, you may owe more on your current loan than the car is worth. This situation is known as negative equity and it means that you will pay more for your new loan.
Let’s say you have $ 5,000 in credit on your car loan. The dealer tells you the trade-in value of your car is $ 4,000, so you have $ 1,000 in negative equity. When you buy a $ 20,000 car, you fund $ 21,000 for a $ 20,000 car.
To learn: How to get out of a car loan that you cannot afford
When you talk about owing more than your car is worth, you may be encouraged to get CAP insurance. GAP stands for Guaranteed Car Insurance and it covers the difference between the amount your car insurance covers and the amount outstanding on your loan if your car is totaled or stolen.
Even if 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 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. Then add this to any fees associated with refinancing the car loan to see the real cost.
The best time to buy a car is when you can afford it, and that means considering the opportunity cost. Opportunity cost refers to the financial opportunity that you give up by spending your money in a different way. So, with car loans, 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 or that you cannot pay off your other debts as quickly as you would like.
Find out: The 30 biggest do’s and don’ts when buying a car
Extended vehicle warranties 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. These guarantees are not required, so think carefully before agreeing to one.
Credit Insurance Protection
Credit insurance covers your car loan payment in certain situations, such as layoffs or disability. It can get expensive, so check your existing insurance coverage to see if you already have coverage for it pay your bills Under these circumstances.
Taxes and Fees
When buying a new car, the sticker price is just the beginning. You also pay a registration fee, sales tax, and a documentation fee. Sales tax and registration fees cannot be avoided and are regulated by the state. The Document Fee or “Document Fee” may be at the discretion of the merchant and in some cases may exceed $ 500. Try negotiating it down or paying in cash.
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These hidden fees and charges are costs that anyone who finances a car will face, but few people talk about them or factor them into the real cost. While these costs may be hidden, 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.
Daria Uhlig contributed to the reporting on this article.