A car is undeniably one of the most important, and most complicated, purchases that a person will make. Unlike items you might price compare between different stores, it can feel like an obstacle course just finding out the true price of a car. When it comes time to decide how to pay, the whole process becomes even more frustrating and confusing, especially since mistakes can result in major debts and credit damage.
There are thousands of articles and guides online meant to help people figure out how best to finance their car purchases, but are people actually doing the research?
We surveyed over 4,000 people to find out how many respondents are being fooled by four of the costliest and most common myths about car loans.
Here were some of the key takeaways:
- More than half (57%) falsely believe it’s always better to pay for a car in cash.
- Almost half (47%) don’t know how refinancing a car loan can save money.
- Almost a third (29%) incorrectly believe being approved for a car loan means they can afford the car.
- 2 in 3 people aren’t aware that it’s possible to get a good loan rate even with a low credit score.
Myth #1: Paying Cash Is Cheaper Than a Loan
The truth: Buying on credit can be smarter and cheaper than paying cash up front.
It’s a common misconception that paying cash is always the more responsible and financially sound way to make a purchase. In many cases, this is true: you should never use credit to buy something you can’t actually afford, and getting into a habit of borrowing money to pay for purchases is an easy way to find yourself buried in unmanageable debt. That’s why many people stick to buying things with cash.
But when it comes to cars, buying on credit can be smarter and cheaper than paying cash up front — and 57% of people aren’t aware they could be making that mistake.
Auto purchases are unique because they’re subject to something called the “dealer reserve,” which is a cut of the interest that goes directly to the dealer when you finance your purchase through them.
For instance, if you’re approved for a loan through the dealership at 2.5 percent interest, the dealer may tell you that you were approved at 3.5 percent and keep the additional percent interest.
That’s why the dealer would much rather see you finance your car — and is more likely to offer you a discount to get you to do so.
Myth #2: Refinancing a Car Loan Can’t Save You Money
The truth: Refinancing a car loan can bring down interest rates, lower your monthly payment, shorten the terms of your loan, and bring down the overall cost of your car.
Just over half of people surveyed said they understood how refinancing a loan could save them money.
Almost one in five respondents didn’t know it was possible to refinance a car loan at all, while an additional 28 percent didn’t realize that doing so could actually save them money. Depending on the cost of a car, not considering the option to refinance could cost a person thousands.
Refinancing can bring your interest rates down anywhere from 2 to 5 percent. Say you start with a 6.95 percent rate on a $25,000 loan — refinancing and lowering your rate just 2 percent will save you nearly $1,400 over the course of a 60-month loan.
Use a refinancing calculator to figure out exactly what’s possible for your particular loan.
Myth #3: You Can’t Get a Good Loan Rate Unless You Have Good Credit
The truth: There are various strategies and tactics that people can use to secure better loan terms, even with low or no credit.
Over 60 percent of respondents said they believe that having low credit means you’re stuck with high interest rates. However, that’s not necessarily the case.
Generally speaking, people with lower credit scores will be offered worse terms on a loan. But there are workarounds for those with fair, poor or no credit — for instance, finding a co-signer or pre-qualifying with a credit union can get you better rates even if you have a less-than-stellar borrowing record.
A super prime loan can have an interest rate that’s 4 to 6 percentage points lower than a non-prime loan. On a $25,000 loan over 60 months, that can add up to a difference of almost $3,000 in interest, so it’s worth looking into ways you can get approved for those better terms.
Myth #4: A Loan Approval Means You Can Afford a Car
The truth: People will often be approved for loans with monthly payments that are much larger than they can afford.
Almost a third of people surveyed said that they believed getting approved for a loan amount means that they can afford to spend that amount on a car. This is one of the most dangerous, most expensive mistakes that a car buyer can make.
When a lender evaluates your ability to pay back a loan, they’re only looking at your income and financial history, not the other financial obligations you may also have each month. By buying a car worth the maximum amount you’ve been approved for, you’re committing to a much larger monthly payment for five years or more.
Getting behind on those payments, or forgetting to account for future expenses like buying a home or sending a child to college, can ultimately drown a borrower in debt or even force them to declare bankruptcy.
Bottom Line: Auto Loan Misunderstandings Cost Thousands
The majority of people are not up to date on the ins and outs of the auto loan process, and as a result, they’re losing thousands of dollars. The cost of a car-buying mistake can vary from a few thousand dollars extra that add up slowly over time to a more disastrous scenario that depletes a person’s savings, sinks them into debt, and makes it impossible to get home or student loans in the future.
Those who do find themselves underwater in auto loan debt should talk to a credit professional who can help make a plan to right their financial ship, repair past mistakes and make healthier money decisions.
For those who are planning to buy a car in the future, it’s absolutely essential to take the time to figure out exactly where you stand, calculate what you can afford and hunt down the best loan offer possible. It may feel like a lot of work, but doing it ahead of time will undeniably save you money, time and stress.