Finance expert reveals car loan mistakes that will cost you more

In recent years, an increasing number of used motors – as well as up to 90% of new cars – have been purchased on finance agreements.

In fact, between October 2021 and September 2022, more than 1.5 million used vehicles were bought with the help of financing instruments.

Car loans are a great solution to alleviate the expenses of purchasing a motor outright, keeping your hard-earned money in check. However, if you don't carry out your own research beforehand, you may stumble into common pitfalls that could end up costing you more pounds in the long run.

Samuel Brackenbury, Consumer Direct Operations Manager at vehicle finance company First Response Finance, reveals some of the most frequent car loan mistakes among British borrowers, highlighting the importance of making informed decisions to bag yourself a good deal.

Not doing your research

Researching what various lenders have to offer is the first crucial step to securing a loan that won't be too harsh on your finances in the long term.

Brackenbury explained: "One of the most common mistakes car buyers make is closing a loan deal at the first opportunity without taking the time to do their homework and consider some of the different options available.

"Just like you shouldn't visit a single car dealership when picking the car of your dreams, you shouldn't feel obliged to take out a loan with the first lender you meet, especially if their offer doesn't quite match your needs and budget.

"Instead, do your research and take a close look at what's on the market, as each lender will provide their own interest rates and loan lengths based on your situation.

"If you immediately commit to one specific lender, you could be missing out on more convenient offers that might suit your pockets way better."

Ignoring your credit score

Not knowing your credit score when negotiating a car loan deal means you will be discussing your options blindfolded.

If you ignore your credit score, you might be unaware of the rates you're eligible for and could end up being overcharged with higher instalments that won't benefit your pockets.

It's vital to know if you have a poor credit score, too. This allows you to work towards improving your position in the build-up to a car loan, so you can benefit from more advantageous deals when searching for car loan options.

So, stay informed about your situation, as it will give you a better idea of what to expect in terms of negotiations, interest rates, and successful applications.

Focusing on monthly payments only

It's easy to fall into the trap of focusing solely on how much you'll need to pay your lender each month.

In fact, as long as the instalments fit within their budget, many people are happy to close a deal that looks cost-effective on paper. However, this can turn out to be a pricey mistake, as you'll be neglecting the bigger picture and missing additional expenses you might need to cover down the line.

When looking at your car finance options, it's wise to take the Annual Percentage Rate (APR) into careful consideration. The APR combines admin charges, interest rates, and loan length, allowing you to work out any extra fees and better understand how much the loan will actually come to cost.

This will give you the opportunity to compare the cost of borrowing between different lenders and products, meaning you'll be able to figure out whether a specific loan fits within your overall budget.

Including add-ons in finance deal

From heated seat covers and parking sensors to advanced audio systems and extended warranties, there are plenty of items you might be lured with when purchasing a vehicle.

While they might sound handy at first, it's always best to think carefully about the value and necessity of these add-ons first. In fact, extras usually come at an additional cost that will contribute to your loan principle, increasing your monthly instalments as well as the interest you'll pay throughout your loan term.

Also, don't forget to check for any potential overlap before buying an add-on. There's a chance that thanks to your existing car insurance or warranty, you might already have the benefits that come with a specific add-on, such as rim and tire protection.

Ultimately, car loans are a handy solution to make the costs of a vehicle more manageable, but they can quickly become pricey if you make the wrong decisions.

However, with a few aces up your sleeve, from shopping around and being aware of your credit score to double-checking the need and value of specific add-ons, you can take out a beneficial loan that won't stun you with costly surprises.