10 Costly Car Loan Myths You Shouldn’t Believe
When it comes to financing a car, there’s a lot of misinformation out there that can lead buyers into financial trouble. Many people fall for common car loan myths, which can result in paying too much interest, taking on unnecessary debt, or making poor financial decisions. To help you make the best choice, here are 10 car loan myths you shouldn’t believe—along with the truth behind them.
1. A Lower Monthly Payment Always Means a Better Deal
Myth: The lower the monthly payment, the better the loan.
Reality: A lower monthly payment often means a longer loan term, which results in more interest paid over time. While smaller payments may seem budget-friendly, they can cost you thousands more in the long run. It’s better to focus on the total cost of the loan, not just the monthly payment.
Better Approach: Aim for the shortest loan term you can afford while still keeping the payment manageable.
2. You Must Finance Through the Dealership
Myth: The dealership is the best place to get a car loan.
Reality: While dealerships offer financing, their rates aren’t always the best. Many dealerships mark up interest rates from lenders to make extra profit.
Better Approach: Get pre-approved from a bank, credit union, or online lender before shopping for a car. You can then compare their rates to the dealer’s offer and negotiate a better deal.
3. A Longer Loan Term Saves You Money
Myth: Spreading payments over more years makes the car more affordable.
Reality: A longer loan term increases the total interest you pay, making the car more expensive in the end. You may also owe more than the car is worth for much of the loan term.
Better Approach: Choose a loan term of 60 months or less to minimize interest costs and avoid being upside down on the loan.
4. You Need a Large Down Payment to Get a Car Loan
Myth: If you don’t have at least 20% for a down payment, you won’t qualify.
Reality: While a larger down payment reduces your loan amount and interest costs, many lenders allow low or no down payments—especially for buyers with good credit. However, putting down nothing means paying more in interest over time.
Better Approach: Try to put at least 10-20% down to lower your loan balance and reduce your overall costs.
5. Your Credit Score Doesn’t Matter If You’re Approved
Myth: Once a lender approves you, your credit score is no longer important.
Reality: Your credit score determines your interest rate. If you have a low score, you may be approved but at a very high interest rate, costing you thousands more over time.
Better Approach: Check your credit score before applying and work to improve it if necessary. Even raising your score by 50 points could help you qualify for a much lower rate.
6. You Can’t Negotiate the Interest Rate
Myth: The lender’s interest rate is final.
Reality: Interest rates can be negotiated, especially if you have a good credit score or a pre-approval from another lender. Dealerships often mark up rates, so negotiating can save you money.
Better Approach: Shop around for the best rates and use competing offers to negotiate a better deal with the lender.
7. Refinancing a Car Loan Is Difficult or Impossible
Myth: Once you’re locked into a car loan, you can’t change it.
Reality: Car loans can be refinanced, especially if your credit score has improved or if interest rates have dropped since you took out the loan. Refinancing can lower your monthly payment or reduce the interest you pay.
Better Approach: If you have a high-interest loan, check with lenders after 12-18 months to see if refinancing can save you money.
8. Leasing Is Always Cheaper Than Buying
Myth: A lease always has lower monthly payments, so it’s the best deal.
Reality: Leasing may have lower monthly payments, but you never own the car and may face mileage restrictions and extra fees. Buying a car can be cheaper in the long run, especially if you keep it for many years after paying off the loan.
Better Approach: Consider your long-term financial goals—leasing may be a good short-term option, but buying is often the better long-term investment.
9. Getting a Loan From Any Lender Is the Same
Myth: All lenders offer similar loan terms, so it doesn’t matter who you borrow from.
Reality: Interest rates, fees, and terms vary widely between lenders. Some banks and credit unions offer lower rates than dealerships, while others charge high fees.
Better Approach: Compare offers from multiple lenders, including banks, credit unions, online lenders, and dealerships.
10. Paying Off a Car Loan Early Will Hurt Your Credit
Myth: Paying off a car loan early lowers your credit score.
Reality: Paying off a loan early doesn’t hurt your credit, but it may not improve it much either. While having an active loan helps build credit, keeping a loan just to boost your score isn’t worth paying extra interest.
Better Approach: If there’s no prepayment penalty, paying off your car loan early can save you money on interest.
Final Thoughts
Car loan myths can lead to costly mistakes that keep you in debt longer than necessary. By understanding the truth behind these myths, you can make smarter financial decisions and avoid paying more than you should.
Before financing a car, do your research, shop around, and negotiate to get the best possible deal. A little effort upfront can save you thousands of dollars over the life of your loan.
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