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Auto loans are a common way to finance a car purchase, but misconceptions about them can lead to poor financial decisions. Believing in myths can cause you to pay more than necessary or miss out on better loan options. Here’s a closer look at some of the most prevalent auto loan myths and the truth behind them.
1. You Need Perfect Credit to Get an Auto Loan
The Myth: Only individuals with excellent credit scores can qualify for an auto loan.
The Truth: While a high credit score can help you secure better interest rates, lenders offer loans to people with a wide range of credit scores. Borrowers with less-than-perfect credit may pay higher interest rates but can still qualify for financing. Additionally, some lenders specialize in loans for those with bad credit, making it possible to purchase a car even with financial setbacks.
2. The Lowest Monthly Payment Is the Best Deal
The Myth: A lower monthly payment means you’re getting the best deal.
The Truth: While low monthly payments may seem appealing, they often result from extended loan terms. Longer terms mean you’ll pay more in interest over time, increasing the overall cost of the loan. Instead of focusing solely on the monthly payment, consider the loan’s total cost, including interest and fees.
3. Pre-Approval Isn’t Necessary
The Myth: You can always secure a loan after choosing a car, so pre-approval is unnecessary.
The Truth: Getting pre-approved for an auto loan gives you a clear understanding of your budget and interest rate options. It also gives you leverage during negotiations with dealerships. Without pre-approval, you may end up agreeing to less favorable loan terms.
4. You Can’t Negotiate Loan Terms
The Myth: Auto loan terms are non-negotiable and fixed by the lender.
The Truth: Many aspects of an auto loan, including the interest rate and loan term, are negotiable. If you have a good credit score or a competing loan offer, you can use these as leverage to negotiate better terms. Additionally, shopping around with multiple lenders can help you find the best deal.
5. Making the Minimum Down Payment Is Enough
The Myth: Putting down the minimum required amount is sufficient when financing a car.
The Truth: While some lenders allow minimal or even zero down payments, a larger down payment reduces the principal amount you borrow, leading to lower interest charges and monthly payments. A substantial down payment also minimizes the risk of being “upside down” on your loan, where you owe more than the car’s value.
6. Paying Off an Auto Loan Early Always Comes with Penalties
The Myth: Lenders charge prepayment penalties for paying off an auto loan early, so it’s better to stick to the loan term.
The Truth: While some loans have prepayment penalties, many auto loans do not. It’s crucial to read your loan agreement or consult your lender to understand the terms. Paying off your loan early can save you money on interest, so it’s worth exploring if penalties don’t apply.
7. Refinancing Is Only for Struggling Borrowers
The Myth: Refinancing an auto loan is only for people who can’t afford their current payments.
The Truth: Refinancing is a smart financial move for anyone who qualifies for a lower interest rate or better loan terms than their existing agreement. Even if you’re comfortably making payments, refinancing can reduce your overall loan cost or shorten the loan term.
8. You Have to Finance Through the Dealership
The Myth: Financing through the dealership is your only option when buying a car.
The Truth: While dealerships often offer financing options, they are not your only choice. Banks, credit unions, and online lenders also provide auto loans, often at competitive rates. Exploring multiple options ensures you get the best terms and conditions for your loan.
9. Leasing Is Always Cheaper Than Financing
The Myth: Leasing a car is always more affordable than financing one.
The Truth: Leasing typically has lower monthly payments than financing, but you don’t own the car at the end of the lease term. Over time, leasing multiple vehicles can cost more than purchasing one outright. The better option depends on your financial goals and driving needs.
10. A Co-Signer Fixes Bad Credit Automatically
The Myth: Adding a co-signer to your auto loan will eliminate all the challenges of having bad credit.
The Truth: A co-signer can help you qualify for a loan or secure better terms, but they don’t erase the risks of poor credit. The co-signer becomes equally responsible for the loan, and their credit could be affected if you fail to make payments. Lenders still consider your credit history when setting terms.
11. Auto Loans Are Only for New Cars
The Myth: You can only get an auto loan for a brand-new vehicle.
The Truth: Auto loans are available for both new and used cars. In fact, many lenders offer competitive rates for financing used cars, making them an accessible option for budget-conscious buyers. However, interest rates for used cars may be slightly higher due to depreciation risks.
12. Once Approved, Your Loan Terms Can’t Change
The Myth: Once your auto loan is approved, the terms are locked in and final.
The Truth: Some dealerships may use a tactic called “spot delivery” or “yo-yo financing,” where they initially approve you for favorable terms but later claim they need to revise the loan due to lender issues. To avoid this, secure financing directly from a trusted lender or ensure the loan terms are final before signing.
13. Zero Percent Financing Is Always the Best Option
The Myth: If a dealership offers 0% financing, it’s always the best deal.
The Truth: While 0% financing can save on interest, these offers often come with strict eligibility criteria, shorter loan terms, or limited car model availability. Additionally, opting for a rebate or discount instead of 0% financing might save you more in the long run.
Conclusion
Auto loans can be a valuable tool for purchasing a car, but falling for common myths can lead to costly mistakes. By understanding the truth about auto loans, you can make informed decisions, save money, and secure favorable terms. Remember to shop around, read your loan agreement carefully, and focus on the total cost of the loan rather than just the monthly payment.
