Buying a car is an exciting time, but navigating the world of car finance can be overwhelming. From credit scores to loan terms, there's a lot to consider. To help you steer clear of potential pitfalls, we've compiled a list of common car finance mistakes to avoid.

Mistake #1: Ignoring your credit score

Your credit score plays a significant role in determining the interest rate you'll qualify for on your car loan and whether you can take out a loan at all.

Your credit score is determined by the information contained in your credit report, including factors such as:

• The total amount of money you've borrowed
• The frequency of your credit applications
• Your history of timely payments

In Australia, credit scores range from zero to either 1,000 or 1,200, depending on the credit reporting agency, with a good credit score typically falling between 700 and 832. A higher credit score indicates lower risk to lenders, potentially leading to better loan terms and cost savings.

Ignoring your credit score or neglecting to check it before applying for finance can therefore be a costly mistake. Before applying for a car loan, take the time to review your credit report, address any errors or discrepancies, and work on improving your credit score.

Mistake #2: Overlooking the total cost

When taking out a car loan, many buyers focus solely on the monthly loan payments and overlook the other costs involved. Remember to consider factors such as the loan term, interest rate and any other fees or charges associated with the loan, as well as additional costs related to car ownership. Failing to budget for these expenses can leave you financially strapped down the road.

Before applying for a loan, set a realistic budget that covers:

• Monthly payment: aim for a comfortable amount – often 10–15% of your gross income.
• Insurance: consider car type, driving habits, and desired coverage options.
• Maintenance: regular servicing and unexpected repairs are inevitable expenses.
• Fuel: research fuel efficiency and calculate costs based on your driving needs.
• Other expenses: don't overlook registration, taxes and things like potential parking fees.

Remember, financial well-being extends beyond vehicle ownership. Prioritise essential expenses and ensure the loan payment comfortably aligns with your overall financial picture.

Mistake #3: Not exploring your options

One of the biggest mistakes you can make when it comes to car finance is skipping the research phase. It's crucial to shop around for the best loan terms, interest rates and financing options available to you. Don't settle for the first offer that comes your way – take the time to compare quotes from multiple lenders to ensure you're getting the best deal possible. When it comes to car finance, there are several options available, including:

• Dealerships: dealerships typically offer a convenient, streamlined buying and financing process, allowing you to complete both transactions in one place. However, they often mark up interest rates and choice can be limited as they primarily focus on their partnered lenders.
• Banks and credit unions: banks and credit unions offer easy access to competitive rates and can guide you through the financing process and address any questions or concerns you may have. However, they generally have more stringent lending requirements, which may limit the availability of loans if you have bad credit or want to buy an older vehicle.
• Online and specialist lenders: online lenders provide a fast and convenient option for securing car finance. They are often more flexible than banks and may consider a wider range of applicants and vehicles, though with potentially higher interest rates and fees.

It’s also important to know the difference between lenders and car finance brokers. Lenders, like banks and credit unions, offer loans directly, while brokers act as intermediaries, connecting borrowers with multiple lenders to find suitable loan options for a fee.

Mistake #4: Skipping the pre-approval process

Not getting pre-approved can be a costly mistake when it comes to car finance. Pre-approval involves applying for a loan before shopping for a car. Doing this allows you to shop for a car with confidence, knowing exactly how much you can afford to spend and what interest rate you qualify for.

The process for getting pre-approved is similar to the loan application process, but without the hard credit check that can impact your credit score. Once you have it, you can compare offers from different lenders to find the one that best suits your borrowing needs, considering factors such as loan amount, interest rates, fees and other terms.

Pre-approval usually remains valid for up to three months, giving you time to assess your options and decide whether to proceed with a car loan application rather than make a rushed decision or submitting multiple applications. It also puts you in a stronger negotiating position with dealerships and private sellers, as you'll already have financing lined up.

Mistake #5: Not reading the fine print

Before signing any loan agreement, it’s important to familiarise yourself with the small print, which will cover aspects such as:

• Interest rate: the annual percentage rate (APR) reflects the true cost of borrowing, encompassing both the base rate and any additional fees. Understand how it's calculated and its impact on your total loan cost.
• Loan term: the length of the loan, expressed in months or years, determines your monthly payment amount and total interest paid. Choose a term that aligns with your budget and repayment goals.
• Prepayment penalties: some loans penalize early repayment, potentially negating the benefit of paying off your loan sooner. Ensure you understand any associated fees.
• Late payment fees: understand the consequences of missing or delaying payments, including potential penalties and impact on your credit score.
• Additional fees: be aware of any origination, processing, or documentation fees associated with the loan. Factor these into your overall loan cost comparison.

Don't hesitate to ask clarifying questions and seek professional advice if needed. Remember, informed consent is crucial for making responsible financial decisions.

Mistake #6: Getting upside down on your loan

Getting “upside down” on your car loan means that you owe more on the loan than the actual value of the car. This situation can arise due to several factors, such as:

• Selecting a lengthy repayment term, which results in lower monthly payments but slower reduction of the principal balance.
• Providing a minimal down payment or opting for a zero-down payment financing option, which increases the financed amount.
• Choosing a vehicle with rapid depreciation, leading to a faster decline in its market value.

To avoid this situation, consider the following strategies:

• Make a larger down payment to reduce the loan amount from the outset.
• Opt for a shorter loan term to pay off the principal faster and minimise the risk of owing more than the car's value.
• Select a vehicle with strong resale value to mitigate depreciation-related losses and reduce the likelihood of becoming upside down on the loan.

Avoiding these common car finance mistakes can help you enjoy a smoother, more stress-free car-buying experience. If you need more support, you can turn to Savvy. Our service provides expert guidance and access to hundreds of loans from more than 40 lenders to help you find the best car loan for your needs. Get the wheels in motion today.