What Not To Do When Shopping For An Auto Loan

What not to do when shopping for an auto loan

Shop at a “buy here pay here” lot

You might have heard commercials from local car dealerships targeting subprime buyers, but be wary. Those “buy here pay here” dealerships will generally charge more money for cars than they are worth. “Buying a car from one of these lots won’t necessarily hurt your credit score, but it won’t help it either,” says Ulzheimer. That’s because these lots don’t have to report to the credit reporting agencies, meaning your credit score will remain the same even if you make all of your loan payments on time and in full.

Don’t get schmoozed by verbal promises

It’s easy to believe a salesman, particularly when they’re telling you things you want to hear about your car loan. Don’t believe your car salesman or F&I officer based solely on verbal promises. Make sure everything is in writing before you agree to terms.

Go car shopping without checking out your options

A lot of consumers are misinformed about what their credit score is and what options they have for financing based on it. Do some research before you go car shopping to see what rates you are eligible for. If you are clearly uninformed, you could wind up signing on to an interest rate that is way higher than what you are eligible for. In addition, avoid talking about yourself as high-risk: the more desperate you appear, the more likely you are to have interest points tacked on unnecessarily, which just translates to money in your salesman’s pocket.

Spring for extras

When you’re already tight on cash, you don’t need to pay for extras that aren’t necessarily worth the money in the first place. Things like extended warranties, GAP insurance and credit life policies are all optional (regardless of what your F&I officer tells you) and could end up costing up to thousands of additional dollars over the lifetime of your loan.

Sign anything without reading and understanding it thoroughly

I know you just want to get out of the dealership and on the road, but if you remember only one thing from this article, let it be to read everything carefully before you sign and walk away. Neglecting this could end up costing you thousands of dollars and/or making your credit even worse depending on what is included in your contract. Ask questions if you don’t understand, and don’t be afraid to walk away and tell the F&I office that you need some time to think it over before you sign. They’ll want your business when you’re ready to give it to them, no matter how much of a fuss they make at the thought of you leaving.

Things to look for include: penalties for prepayment, a loan with pre-calculated interest and who the primary buyer is when you are getting a cosigner.

Leave the dealership before you finalize your financing

What a cruel trick played on eager consumers who just want a vehicle that will drive. Smooth-talking dealerships will offer you financing “based on final approval,” and will let you drive off the lot before your financing is actually finalized. You, the unsuspecting consumer, are later told that your original financing wasn’t approved and are then slapped with a significantly higher finance rate. Don’t fall for this. Leave the lot in your old clunker, take the bus, walk home or catch a ride with a friend instead of driving off the lot in a car without approved financing.

What to do if you end up buying an auto loan with a high interest rate


“A lot of people don’t realize they can refinance their auto loans,” says Ulzheimer. “They think of refinancing for house loans and student loans, but they don’t know that they can get a better rate on their auto loan by refinancing when their credit score gets better.”

If you absolutely need a car and you end up with a punitive interest rate, keep in mind that you can refinance in 12 months, or whenever your credit score goes back up. Talk to your lender to find out what your options are. You don’t need to pay 30 percent interest for five years if your credit score improves and allows you to get better financing.

Pay more than the minimum payment, and pay on time

Another way to reduce the time period of your loan is to pay more than the minimum payment each month to reduce the amount of overall payments that you make. If you can’t pay more than the minimum, at least make sure that you make your payments on time. even at a high interest rate, an auto loan will still help your FICO score.

An auto loan is “an installment loan and it contributes to the ‘mix of credit,’ which is a factor in your FICO score,” according to Harzog. However, “it’s only 10 percent of your score so don’t expect to get a big bump in your score.”


Whether you have no credit history or you have made some mistakes in the past, having a bad credit score can make it difficult to shop for a car loan. However, many banks offer auto loans to people with bad credit. Start by asking your local bank or credit union where you keep your checking and/or savings account to see if they can help you with an auto loan. Larger national banks can also help you secure an auto loan if you have bad credit.

In general, it is better to go with a bank or an auto financing lender rather than the car dealership down the street that is offering a “buy here, pay here” deal. If you do wind up with a high interest rate on your car, work on rebuilding your credit score so that you can eventually refinance. As Harzog says, “When you have good credit, you often have good options.”

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