Some people are so excited that they qualify for a car loan that they do not look at the terms.
However, paying too much interest on your car loan can mean thousands in extra interest payments over the course of the loan. How much is thousands? If you are paying an interest rate in the high teens, you could pay twice the sticker price of the car by the time you have paid off the loan.
High Interest Hits Two Ways
Obviously, one of the risks of high interest is that you are simply overpaying for your vehicle. However, there is also a hidden risk. When you went to buy your car, you had a budget in mind. With that budget came a monthly payment amount you thought you could afford. If you are paying an exorbitant interest rate, then your monthly payments are probably too high, as well. That not only costs you extra money, but also increases the likelihood that you will default on your loan.
What Monthly Payment Can You Afford?
Did you know that the average monthly car payment has been steadily increasing? The increase has been slow over the last decade, but dramatic in the second half of 2021. The relative scarcity of new cars has not only increased the price you will pay but has also lowered incentives for dealers to offer low credit rates, even for people with good credit.
Should You Take That Loan?
Before you decide whether or not to take a loan, you should do your research ahead of time. First, find out your credit score before you ever head to the dealership. Then, look at the interest rates people are paying for new car loans in your credit rating range. If the dealership offers you an interest rate outside of that range, do not take the loan.
Search for a Loan Before You Buy Your Car
You may be surprised to find out that you can get preapproved for car loans before you ever go car shopping. Your bank may offer car loans, some insurance companies offer car loans, and you may even get loans through services and memberships in professional organizations, wholesale clubs, etc. If you have a loan offer before you head into the dealership, you may be able to get a lower interest rate from the dealership.
Consider Refinancing Your Car
Have you already purchased a car at a too-high interest rate? You may be able to refinance that purchase. Look into options for refinancing. If you have improved your credit since the time of your car purchase, you could see a several point change from your original interest rate.