The Road to Smart Car Financing: Mistakes to Avoid When Applying for a Car Loan

Getting an auto loan can be your ticket to owning that dream car you've always wanted. But hold your horses.

Before securing that car, there’s a winding road ahead that you must navigate. Otherwise, you might get stuck in a financial traffic jam or with a vehicle you can’t afford. 

But don’t let that deter you.

In this piece, we'll point out the common mistakes people make when applying for a car loan and raise your knowledge on how these mistakes can give you a financially bumpy ride. Best of all, we'll show you the shortcuts to a successful car loan experience.

So, buckle up, and let's set out on this adventure together!

Mistake 1: Not Comparing Lenders

Imagine you're at the local market and spot a packet of rice on a stall. It looks good, so you grab it without checking the prices at other stalls. But after you've paid, you walk further and find the same type of rice at a cheaper price.

You’ll feel conned. That's precisely how you’ll feel if you don’t compare lenders when looking for a car loan. As different stalls might offer the same rice at different prices, lenders offer various loan rates and terms.

For example, let's look at two lenders: Platinum Credit Limited and Ngao Credit Finance. 

Platinum Credit Limited offers car loans of up to 75% of the total estimated cost, with a duration of 3 months to 3 years and an interest rate of 2.25% per month.

On the other hand, Ngao Credit Finance provides loans for up to 60% of the total estimated cost, with a similar loan duration of 3 months to 3 years but at an interest rate ranging from 3.5% per month.

Each of these lenders has its pros and cons, just like different stalls at the market. So, when comparing loans, pay attention to interest rates, loan amounts, fee structures, and other details to ensure you get the best deal.

The good news is that comparing lenders is as easy as asking a friend for a shopping tip. For instance, you can use Money254 as your shopping assistant to compare auto loans. 

Read Also: Full Guide: The Process of Car Financing in Kenya.

Mistake 2: Buying a Car You Can't Afford

If you don’t stick to what you can afford, your car loan can cause endless financial stress due to overextending your finances.

So, before you rush to buy that car, take a minute to check your financial situation and create a budget so you don’t end up in the dreaded debt cycle.

Budgeting for your car

Here's a simple plan to make sure you don't overspend:

• Know your monthly budget: Determine how much you can spend each month on a car payment without skipping other important stuff like rent or groceries.
• Set a money limit: Decide the most you'll pay for the car. Consider how much you can put down and how long you'll make payments.
• Add up all the costs: Don't just look at the car's price. Think about things like insurance, gas, repairs, and registration fees.

Following these steps will ensure you secure a car that fits your lifestyle and is on the right financial track.

Read Also: My First Car: Bitter Lessons from Skipping Due Diligence.

Mistake 3: Ignoring Down Payment and Loan Term Considerations

Imagine you decide to build a house without a proper foundation. You use just a few bricks and choose a contractor who promises the longest construction time and lower monthly payments.

The result? You end up with a shaky, expensive structure that takes forever to complete.

Similarly, when you ignore your car loan's down payment and loan term, you use a weak foundation and extend the repayment period. This can lead to higher overall costs and feeling stuck in a never-ending payment cycle.

That said, a large downpayment is not always the best option. 

For instance, tying up a significant portion of your funds in a down payment may not be advisable if you need to maintain access to cash for emergencies or other investment opportunities.

Similarly, if you have alternative investment opportunities with higher returns than the auto loan's interest rate, it could make more financial sense to make a smaller down payment and invest the remaining funds elsewhere.

Furthermore, if you plan to use the car for income generation, such as operating a matatu, allocating your funds differently to maintain working capital for your business might be a better strategy

So, choose a reasonable loan term.  Strive to strike the right balance between manageable monthly payments and minimizing interest costs.

Mistake 4: Skipping the Fine Print

The car buying process can be quite a marathon. It can wear you down.  When you're ready to sign that final document, you’d probably only want to hit the road in your new ride.

But here's the thing. Before signing the final document, read the fine print carefully to avoid missing important details.

Ignorance is no defense, and you want to avoid those nasty surprises down the line.

What to look out for in the fine print

Here's your checklist to ensure a smooth ride:

• Check the details: Pay attention to interest calculation methods, late payment penalties, and insurance requirements.

• Correct any mistakes: Sometimes, errors can creep into the paperwork. Make sure all the details are accurate before signing.

• Seek clarification: Don't hesitate to ask questions if you encounter unclear terms or clauses.

• Beware of hidden fees: Watch out for fees that must be clearly explained. These could include processing fees, documentation fees, or other unexpected charges.

Consider having a legal professional, such as a lawyer, review the fine print of any loan agreement. Legal experts can help you decipher complex terms and conditions that may be challenging to understand.

Read Also: Avoiding Car Dealership Scams: 7 Tips to Protect Yourself.

Mistake 5: Ignoring Future Expenses

Remember, your car loan isn't the only bill you must pay monthly. Besides, your expenses might change over the next 5 years. 

For instance, you could get a kid, leading to additional expenses like school fees, medical bills, etc. 

In addition, your car comes with its financial demands, including fuel, maintenance, parking fees, and insurance. As such, consider these future expenses when considering an auto loan.

Here's a roadmap to ensure you're financially prepared for the long road ahead:

1. Make a list of expected changes: Estimate the associated costs of major life changes, like having children or planning for higher education.
2. Factor in car expenses: Calculate your car's monthly operating costs, including fuel, maintenance, parking, and insurance.
3. Create a flexible budget: Build a budget that accounts for all these expenses.  Keep it flexible to accommodate surprises.
4. Prioritise Saving: Allocate a portion of your income to savings to create a financial safety net for the future.

Read Also: How to Save Money and Get the Best Deal When Buying a Car.

Mistake 6: Focusing Solely on Monthly Payments

When dealing with a car loan, it's easy to become fixated on the monthly payments. But financial planning is more like painting a masterpiece. You need to see the whole canvas.

While monitoring your monthly car loan payments is crucial, it's also essential to consider the broader financial landscape.

Consider your other financial goals, like saving for a house, investing, or creating an emergency fund. These long-term objectives are just as important as managing your monthly car expenses.

When you think about the long-term implications of your car loan, you'll be better prepared to make informed financial decisions, ensuring your vehicle doesn't become a financial burden.

Mistake 7: Skipping Loan Pre-approval

Skipping loan preapproval when shopping for a car is like setting out on a road trip without a map. You might get lost along the way. 

Here are more benefits of getting preapproved.

The benefits of preapproval

1. Helps in budgeting: Preapproval gives you the green light from a lender and tells you precisely how much you can afford. Armed with this information, you can confidently negotiate with a clear understanding of your financial situation.
2. Explore all options: Preapproval allows you to compare loan offers from various sources to find the most favorable terms.
3. Time efficiency: You won't need to wait for loan approval after finding your dream car, making the purchase smoother and quicker.

Steps to getting pre-approved 

1. Gather your documents: You'll need your identification, proof of income, and bank statements. Make sure these are up-to-date and organized.
2. Research lenders: Explore and compare different auto loan lenders to find one that offers favorable car loan terms.
3. Apply for preapproval: Contact the selected lenders and submit your application with the required documents.
4. Wait for approval: Lenders will review your application and financial details. Once approved, you'll receive a preapproval letter specifying your loan amount and terms.
5. Shop for your car: Armed with your preapproval, you can confidently shop for a car within your budget.

Preapproval ensures you're financially prepared for your car purchase journey, helping you avoid overextending your budget and potentially securing a better deal. So get preapproved first before setting out on your car financing journey.

Read Also: Money & Me: Buying My First Car.

Wrapping Up

In conclusion, whether you're a first-time car buyer or looking to upgrade, avoiding these common car loan pitfalls can steer you toward a successful and financially sound journey. So, take your time and make informed decisions to ensure your dream car doesn't become a financial roadblock.