Hidden costs on auto loans are common, whether you're buying a new or used car. While some, like sales tax, are non-negotiable, others can be avoided or minimized. In this article, we'll explain the most common hidden car buying costs, including interest rates, dealer add-ons, and more. By understanding these costs from the start, and learning how to avoid them, you can save money and make a smarter decision about your next auto loan.
Sales Tax
Almost all states charge sales tax on vehicle purchases. Though sales tax is not necessarily a “hidden” auto loan cost, it can often come as a surprise to buyers, as it is not included in the advertised price of a vehicle.
How to avoid or minimize:
You can't avoid sales tax entirely, but you may be able to reduce its impact. Consider trading in your old vehicle to minimize the amount of sales tax you'll owe. You'll only pay sales tax on the difference between the new and used car's value. And some states offer tax exemptions or credits for environmentally friendly vehicles, such as electric or hybrid cars, which can significantly reduce your overall costs.
Registration and Licensing
Registration and licensing fees are government-imposed costs that vary by state and are typically based on factors such as the vehicle's age, weight, and fuel type. Some states may charge a flat rate, while others may base the cost on the vehicle's value.
How to avoid or minimize:
While you can't avoid these costs, understanding them can help you budget accordingly. To get an accurate estimate of the registration and licensing prices in your area, consult your local Department of Motor Vehicles (DMV).
Loan Interest Rates
The Annual Percentage Rate (APR) isn't explicitly stated on the vehicle's price tag, but it's an added cost that can impact the total of your auto loan. This rate is influenced by a number of factors such as your credit score, the loan term, and the lender.
How to avoid or minimize:
To minimize costs and secure the best deal, check with different lenders to get the lowest APR possible. Or, consider a shorter loan term to reduce the interest you’ll pay over the life of the loan. If interest rates have decreased, or your credit score has improved since you first took out your loan, try refinancing your car for a better rate.
Origination and Documentation
Many dealerships charge additional fees, such as origination and documentation, to cover the administrative work associated with processing your auto loan. These hidden costs can vary widely and are often calculated as a percentage of the loan amount.
How to avoid or minimize:
Compare offers from different lenders, including credit unions and banks, as they often have lower costs than dealerships. You can also try to negotiate with the dealership to see if they're willing to waive or reduce these add-ons.
Prepayment Penalties
A prepayment penalty is a fee charged by some lenders if you pay off your car early. While it’s not very common on auto loans, it's important to be aware of this potential hidden cost as it can add to your expense.
How to avoid or minimize:
To avoid a prepayment penalty, carefully review your loan agreement and choose a lender that doesn't impose such fees. Additionally, sticking to your original payment plan can help you avoid triggering the penalty.
Extended Warranties and Service Contracts
Extended warranties and service contracts might seem appealing, but they can increase the price of your auto loan by a thousand dollars or more. Plus, these plans often come with restrictions on where you can have your car serviced and may not cover all potential repairs or maintenance costs.
How to avoid or minimize:
To avoid unnecessary expenses associated with service plans and warranties, consider these strategies: invest in a reliable vehicle with a strong reputation for quality and durability; keep up with regular maintenance and inspections to prevent potential issues; and build an emergency fund to cover unexpected repairs.
Loan Payment Fees
Some lenders charge extra when you make a loan payment online, with a credit card, or by phone. And they may charge fees on late payments. These charges may seem small at first, but they can add up over time.
How to avoid or minimize:
Explore other cost-free payment options offered by your lender, such as mailing in a check or using a mobile app. Set up automatic payments directly from your checking account to stay on top of your loan and avoid late charges.
Insurance AdD-Ons
Additional insurance products, such as disability or life insurance, may be offered by lenders along with your auto loan. These products can provide financial protection in certain circumstances, but they can also increase the cost of your car loan.
How to avoid or minimize:
Review your existing policies, such as life or disability insurance, to determine if coverage is necessary. If you decide to purchase additional insurance, shop around for the best rates and coverage options.
Don't let hidden charges surprise you. By being aware of these costs and taking the right steps, you can protect your wallet and secure a great deal on your auto loan. HFCU offers competitive rates, personalized service, and hassle-free auto loans, including the option to roll in taxes and registration fees into your loan. Contact us today to learn more.