Car loans

Car loan mistakes that cost you money.

If you want to save money on your next car purchase, you'll need to do more than just haggle a "good" deal by with the salesman on the forecourt. A mistake on your car loan could cost you money and obliterate any savings you've negotiated on the purchase price.

The big mistakes to avoid are made in the organising the finance of your new car. Making the right decisions can save thousands over the life of the loan.

1. Negotiating the monthly payment rather than the purchase price.

Buying a car based on the amount of the monthly payment is the biggest trap. Although you should know what you can afford each month, never provide that figure to the salesman. If you do, you will lose any power to negotiate a lower purchase price. Don't let the saleman turn you into a monthly payment buyer. A monthly car loan amount tells the dealer how much room is available to hide other costs such as a higher interest rate and add-ons. You should negotiate the price of each cost category separately. Using this technique minimizes the individual pieces of negotiation Price, Trade In Value and the Car Finance Rate.

2. Letting the car dealer know or find out your credit score

Your credit score determines the amount of interest you will pay on your car loan. Your credit score is your creditworthiness as a rating and is based on your credit report with the major reporting agencies, Equifax and Experian. A borrower with a high credit score qualifies for a better car loan rate than one with a low score. Shaving just one percentage point of interest from a £10,000 car loan over 60 months would save hundreds of pounds in interest paid over the life of the loan.

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Once you've checked your credit score you should apply for pre-approved car finance before visiting the dealership. This way you can find out how much vehicle you can buy and the interest rate you qualify for.

3. Refinancing negative equity.

"Negative Equity" is the term used to describe owing more on your car than it is worth.When a dealer tells you that he can include that negative equity into the car financing of the next deal, they mean that he will add it to the purchase price of the new car. You will be paying interest on that negative equity for the term of the new loan. Moreover, if you were in negative equity on your last trade-in, it is likely that you will be in far more negative equity. This practice just keeps making the problem worse. Don't get into the cycle by buying a more expensive car than you can afford. Live within your means.

4. Including add-ons in the finance deal

Nearly 40% of car dealers profit is derived from the sale of "add-ons" such as extended warranties, fabric protection and body treatments.

Even if you want an extended warranty or your seats scotchguarding, these items are available at a lower cost from sources outside the dealership. Putting them into your car loan and paying interest on them for the life of the loan can add hundreds of pounds to the amount you pay.

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