Here are the top six mistakes people make when borrowing to buy a car:
- Not shopping around for the lowest rate on their loan or lease: A loan from your bank may cost you less than one from your car dealer, or it could be the other way around. Check out a few places so that you can get the best interest rate you can.
- Comparing car prices instead of the cost of borrowing: You may get a better price at one car dealer for the same car, but end up paying more for the financing. The purchase price is often less important than the interest rate when it comes down to what it’s really costing you to buy that car.
- Not getting the best rate for the whole time you borrow: Some dealers offer financing as low as zero per cent. It may look like a great deal at first, but that low rate often lasts only a few months before it goes up. Be sure to find out how much interest you’ll pay over the whole time you borrow. Compare that to other loans and make sure it’s still the best deal for you.
- Not looking at the total cost of ownership: Loan payments are only part of the cost of owning and driving a car. What about costs for gas, repairs, insurance, licences and parking? Look closely at your budget to see if having a car is realistic.
- Looking at the size of the monthly payment, not at how much interest you’re paying: Some people think the best deal is the lowest monthly payment. They forget to look at how long they’re borrowing the money. They could end up paying a lot more interest by the time they pay back the loan.
- Using a credit card to pay for the down payment: Some people do this because they can’t get any other loan. Some people even try to pay the full price of the car this way! It could take years to pay back what you borrow for a car. In the meantime, you’ll throw away a lot of money on high interest payments. The interest on a credit card will usually cost twice as much as a bank loan of the same size.
Remember: It pays to be a smart borrower.
Take care when you compare your options. If you don’t, you could end up paying more for your car than you need to. Watch this cartoon series video to learn more about factors like the cost of ownership (operating costs, insurance, maintenance and financing) and how it can contribute to the overall cost of buying a car.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.