Taking a loan out to purchase a car is a big financial decision and will affect your budget for a long time. Choosing a loan package and vehicle are decisions you want to make with confidence. Read on to learn about potential pitfalls of the auto loan process, and ways to be sure you find a trustworthy lender and the best car loans.

Spot predatory lending

If you don't have the best credit, take care to avoid a loan with an unreasonably high interest rate or long loan term. Yes, you might really need a car to get to work or for your children, but having a vehicle is not worth sacrificing your financial wellbeing. For those with low credit scores, even buying a used car can result in sky-high interest rates. Over the life of the loan you could end up paying double or even more the initial cost of the vehicle. With high interest rates and lengthy loan terms on used vehicles, borrowers are lucky if they can repay their loans before they need to replace their cars.

If possible, it’s best to improve your credit score before applying for a car loan. But if you can’t wait, be sure to apply for a loan through a reputable lender with a verifiable history of customer satisfaction.

Avoid negotiating a bundle

Dealerships which offer financing and insurance usually try to negotiate everything (purchase price, loan terms, and fees) into a single package, which makes it unclear and confusing how much you are actually spending. A dealer will knock off a chunk of the vehicle's price and then charge it back in extra fees or with a high interest rate. Negotiate everything separately and read the fine print to make sure you are not being charged unnecessary junk fees, which according to the Center for Responsible Lending include items like theft deterrents, rust proofing, gap insurance, and service contracts. Added up, these fees will more than make up for a reduced sticker price

Know your credit score

Credit scores range from 300 to 850 and are based on a myriad of different factors in your credit history. In 2019, the average American’s credit score was 703. However, this is heavily influenced by age: the older you are, the more time you have to build a solid credit history and thus, a higher credit score. Americans ages 20-29 have an average score of 662, while those 50 to 59 have a 706 average score.

Knowing your score will help you determine the type of interest rate for which you could qualify (the higher the credit score, the lower the rate). If you have poor credit, take steps to improve it before applying for a loan, such as bringing accounts current and paying off collections. You can also work to make steady improvements to your credit score by keeping your credit utilization low. Credit utilization is a ratio of the amount of credit you actually use compared to the amount you’re authorized for, or your credit limit. For example, if you’re authorized to spend $1,000 on a credit card and you’ve charged $200 in the current statement cycle, your credit utilization ratio is 20%. Keeping your credit utilization below 30% is one of the best ways to build a solid credit score over time.

Secure financing before visiting the dealer

Apply for a loan with a trustworthy lender prior to visiting your car dealership. Having financing in hand will give you more power to negotiate and prevent you from exceeding your budget.

If you are ready to apply for a car loan, we encourage you to try out our easy-to-use loan calculator to determine what type of loan will best fit into your budget. At Hills Bank, our lenders are always available to help you through the process of shopping, financing and purchasing a vehicle. You can get in touch with us at any of our locations, by connecting with a banker through the chat bubble on hillsbank.com or by signing into your online banking account, or by calling us at 1-800-445-5725 (1-800-HILLSBK).