5 New Car Financing Pitfalls to Avoid
Posted by: Lydia on 13/09/2019
Buying a new car will always be fun. Whether it’s the first time or the 10th time you’ve purchased a new car, there is always a sense of excitement in the air as you're handed the keys. Whether you're most excited about the cutting-edge exterior or the top-of-the-line digital dashboard inside, buying a new car can be one of the most enjoyable ways to upgrade your life.
Aside from the fun and excitement though, there are also plenty of pitfalls that can come with new vehicle financing. Because so many people are really excited to get behind the wheel, they often overlook or ignore these financial risks until it’s too late. To help ensure your car buying and financing experience is smooth from start to finish, make sure to keep the following pitfalls in mind before you buy.
1. Not having your credit and finances in order
Before you go to buy a car, it’s important to ensure you've ticked all the boxes when it comes to financing. Check your credit score in advance so you know exactly where you stand before you begin shopping around. Also look to see what changes you can make in your current financial picture. Paying off any late accounts, reducing outstanding debts, and looking to ensure you’ve got a healthy savings account are all important steps in this process.
If you don't get your credit in order before you go to buy a car, you may find yourself financing at a higher interest rate and on the hook for all sorts of extra fees. It's far better to wait to car shop until you have your finances in good order.
2. Revealing all your cards
You may have your dream car all lined up, and are already planning to take it on some great road trips. You're probably very excited to get the keys to your new vehicle, and it's understandable that you'll want to share that excitement with your family and friends. But sharing it with those involved in the transaction isn't a good idea. If the salesperson or seller gets the sense that you’re super keen, they'll often be ready to upsell hard, put pressure on you to buy now, or not be as willing to deal – in fact, they may even try to ask for more.
That’s why it’s essential to act cool, calm, and collected once you’ve found a car you like. Channel Nicolas Cage in Gone in 60 Seconds if you need to, but whatever you do, play it casual. It will ultimately increase the odds you'll walk away with a great deal instead of getting upsold because it's known you’ll buy no matter what.
3. Buying add-on services impulsively
A good deal is a good deal, but as Australians hold over $8 billion in car financing debt, it’s also important to maximise your value, and minimise needless costs. A bit of slick salesmanship from a lender can be anticipated, and it's OK to budget for an extra or two, like credit insurance or extended warranties, if these are important to you. It’s worth keeping in mind, though, that many of these are not regarded as good value by ASIC.
Ultimately, it’s really easy to get swept up in the add-on process when you’re in the moment and thinking about your shiny new car, but the hard reality hits when your first payment is due. Figure out your bottom-line budget (including any add-ons) beforehand, and make sure you stick with it no matter what.
4. Going for a longer loan period
You may be offered a lower monthly payment with a longer payback period. If you're financing at a dealership, the financing process will take place on the spot. Even if you've worked out the loan length and payment you want at home, when you're sitting down in front of the finance manager, they may suggest a longer loan period. It may sound enticing to have a lower payment, but ultimately it means you’ll pay more in interest and fees over time, and your vehicle may depreciate much faster than you can pay it off.
If you've put some deep thought into this option ahead of time and know the risks of going for a longer loan, that’s one thing, but if you’re in doubt at all, step back and take some time to think over this decision.
5. Failing to negotiate
Even if you can currently afford the car you want, ask yourself if you can really afford not to negotiate. Certain purchases in life are so special that they might seem worth overpaying for, but it's never a bad idea to try to get the best deal possible, especially since your finances may change in the future and you may find it more difficult to make a larger car payment.
Aside from a property, a car is usually the most expensive purchase an Aussie will make. So even if you're just about ready to sign, it never hurts to step back and ask 'Is this the best price you can do?’ Ultimately, you are buying an expensive item, and you have a right to ensure you get it at the best possible price.
Of course, if you've been searching for your dream car for years and finally found it, you may not care about the price, and find yourself happy to pay a little more.
What to do if you’ve made a mistake
Financing deals can be very rigid, so it’s wise to be proactive in avoiding getting locked into a deal you don’t like. The one upside to financing agreements is that while you may find it hard to get out of it, your financier also wants to keep you happy. This means even after a deal is done you retain some real negotiating power.
The first port of call in this situation is not to ring your current financier, but a rival one. Talk to them about your current deal, and ask them what terms they can offer. When you have that information in hand (assuming it's better than your current deal), ring your current financier. Indicate to them you're unhappy with the current deal and want to renegotiate. Also let them know you plan to buy other cars through them in future.
Although they won’t be happy to lose a little money on your current car, they will likely recognise that they could lose a whole lot more over time if you don’t return to do business with them. Prevention is always better than cure, so keep any mistakes you made in mind the next time you go to buy a car, while also feeling confident that you can usually renegotiate a bad deal to make it a little better.
What other pitfalls should car buyers avoid with their financing? Let us know in the comments below: