Buying a new car is exciting - the research, the test drives, that moment of truth decision. Getting a car loan to pay for your new car? Not as much. The number crunching, the F&I office, finding a good interest rate. Unless they really enjoy math, this step is often the one car shoppers dread the most. Not only can it be unpleasant, going in to get a car loan unprepared can be a costly mistake that will haunt you for years. Whether you’re a first-time car buyer or looking to replace your vehicle, you should take note of the no-nos of auto financing before stepping foot into a dealership. These are the top five costly mistakes to avoid when getting a car loan:

  • Not knowing your credit score
  • Forgetting auto loan pre-approval
  • Negotiating on the monthly payment
  • Taking on a long-term loan
  • Financing the cost of your add-ons

The best way to avoid getting yourself into a car loan pickle is to learn from the mistakes of car buyers that have come and gone before you. We'll take a deeper dive into each one.

1. Not Knowing Your Credit Score

looking up credit score

Your credit report will play a significant role in determining the interest rate on your auto loan. Your credit score is determined by three main credit bureaus that monitor your credit history. Anyone with a good credit score will be offered a better interest rate than someone with distressed credit. If you go in blind about your credit score, the finance office at the dealership may try to convince you that your rate should be higher because you have bad credit. Many people underestimate their credit scores and will just go along with what they are told at the finance office.

By learning what your credit score is and what range it falls into, you'll improve the odds of getting a lower interest rate. Getting sucked into a high interest rate can mean overpaying hundreds of dollars over the course of your loan. 

Get your free credit score 

2. Forgetting Auto Loan Pre-Approval

car interest rate on phone

Auto loan pre-approval is an important step to take when buying a car because it allows you to shop around for a good interest rate. You'll be able to get pre-approved at a bank, credit union or online lender. Just like knowing your credit score, auto loan pre-approval will help make sure you are not overpaying in interest. Getting pre-approved means you are offered a loan amount and interest rate from a lender before you go to the dealership.

This process prevents you from taking the first loan offer the dealership gives you which may not be the best. It also allows you to better negotiate with the dealership because you can show your pre-approval rate to the finance office and try to have them match or beat it to win your business.

Find a great rate on a car loan 

3. Negotiating on the Monthly Payment

Dealership car salesperson
Stick to negotiating the price of the car with your salesperson, not the monthly payment.

When you're at the dealership, the salesperson may ask you what number you're looking at for your monthly payment. Do not (we repeat, do not) reveal this information. While you should be aware of how much you can afford to pay each month, sharing this number with the salesperson will give them the ability to hide additional fees and potentially higher interest rates. According to Bankrate, your best strategy will be to negotiate the price of the car, the financing, and your trade-in separately. 

4. Taking on a Long-Term Loan

loan calendar

Cars, especially new cars, depreciate quickly. A new car will depreciate by 11% as soon as you drive it off the lot. When you take out a long-term loan (over 60 months) it's more likely that you may become upside down on it which means you'll owe more than the car is worth. If you choose to trade it in or sell before the loan term is up, you'll owe more money than you will get for the car. If you choose to keep the car, you'll be responsible for the necessary repairs that come with an older car in addition to the high payments.

Not only will you be paying interest on the car for a longer period of time, when you take out a long-term car loan, your interest rates will also likely increase. According to NerdWallet, you may see interest rates nearly double when you choose to take on a long-term loan compared to a loan that is 5 years or less. This will add up to hundreds of dollars that you could have saved over the course of your loan.

5. Financing the Cost of your Add-ons

Car tinting
It's smarter to pass on the window tinting at the dealership instead of paying interest on it.

Add-ons at the dealership can include antitheft devices, window tinting, floor mats, interior protection, extended warranty and more. While some of these may be useful, when they are rolled up into the rest of your auto loan, you'll end up paying extra in interest over the course of the loan. Usually, you'll find the cost of add-ons at the dealership is marked up and most of them you can just add later. The F&I department makes a good profit when they sell you add-ons. In fact, many dealerships lose money on the actual sale of a new car but make up for it in add-on sales. Therefore, don't be surprised if they try and push some on you. We'd recommend you pass on their offers and look into your desired add-ons after you purchase the car. 

Being aware of these five common car loan mistakes means you'll be prepared to go into the dealership with confidence knowing you can buy your car without accidentally overpaying for it.