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What to avoid when shopping for an auto loan

There are a few red flags to watch out for when shopping for a car. Some of the most common tips to avoid these are:

Don't 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 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," Ulzheimer says. These lots typically don't report to credit reporting agencies, meaning your credit score remains the same even if you make all of your loan payments on time and in full.

Don't let yourself be misled 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 finance and insurance officer based solely on verbal promises. Make sure everything is in writing before you agree to terms.

Don't 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 auto warranties, GAP insurance and credit life policies are all optional (regardless of what your finance and insurance officer tells you) and could end up costing thousands of additional dollars over the life of your loan.


"A lot of people don't realize they can refinance their auto loans," Ulzheimer says. "They think of refinancing for their mortgage rate or federal student loan, 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 high 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% interest for five years if your credit score improves and lets you get better financing.

Pay more than the minimum payment, and pay on time

Another way to reduce the amount of interest you pay is to shorten your loan by paying more than the minimum payment each month. If you can't pay more than the minimum, at least make sure that you make your payments on time since, even at a high interest rate, an auto loan will help your FICO score. Make sure your lender lets you prepay your loan, and ask a representative if there are any prepayment penalties or fees.

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