According to the Center for Public Integrity, auto loans are the second largest source of debt for Americans. If you’re like most adults today, it’s hard to get by without a vehicle. So whether you lease, lease to own, or buy outright, you’ll likely spend much of your adult life carrying some type of auto-related debt burden. Unfortunately, this particular area of the lending market is still rife with hidden fees. Some are obvious, and some are so cleverly disguised you’d have to be an industry insider to ferret them out.

Here's hoping this post will keep you from overpaying on your next auto loan!

1. Yo-Yo marketing

This tactic refers to permitting you, the customer, to drive away in your new car, having first been assured that your financing is approved but "pending." Later, by sometimes as much as a few weeks, the dealer will then call and inform you that the financing was declined, but there’s still a chance to get financing at a new, higher interest rate.

Tips to avoid paying: This one is simple—don’t drive off the lot until your financing is approved and you have the paperwork to prove it.

2. Market interest rate loan offers

It’s a well known industry fact that dealerships and lenders often work as partners to fund profitable auto loans and split the proceeds. For instance, a dealership may offer you a loan with market-rate interest. If you bite without doing your homework first, you may pay quite a bit more in interest than your credit score deserves.

Tips to avoid paying: Be sure not to accept the dealer's offer without doing your own independent research with non-dealership lenders first. You may just discover you can get a much lower interest rate through a credit union, your own bank or another third-party lender. If you then return to the dealership with that offer, you can use it as leverage to bargain them down to a fair interest rate—or even a rate that’s lower than market!

3. Failure to check your own credit score

As a lender, your car salesperson will, of course, run your credit check before offering you financing. Use a free service such as MyFico (you can get a free trial membership that nets you a free, comprehensive credit report—just be sure to cancel before the trial runs out) and get your own independent copy of your credit score. Verify it against what the dealer presents as your "official" score. If you discover a discrepancy, challenge it or walk and find a more honest salesperson to do business with.

Tips to avoid paying: If you don’t check your own credit score, you may be given a higher loan interest rate than your good credit entitles you to. So do your homework!

4. Negotiating on the wrong price

Auto purchases are one of the few, large-ticket items where intense negotiation is still the industry norm. As such, you can expect to negotiate on the purchase price of your new vehicle. But be sure to negotiate on the right price—the total price—and not the monthly car payment. Otherwise the salesperson can easily tack on lots of other fees into that monthly price without you necessarily being the wiser.

Tips to avoid paying: Negotiate as if you were going to pay for the entire invoice in one lump sum. This will give you intel on the dealer's bottom line price for that vehicle. Be sure the total price includes any additional warranty, insurance, taxes and federal or state fees before you begin negotiating.

5. Choosing the wrong incentive

Overall, the auto industry is still intensely competitive, which means purchase incentives are literally everywhere. You don't even need a major holiday or Black Friday sale to cash in on incentives when you’re buying a vehicle. However, experts caution that it’s still critical to choose the right incentive to get the lowest vehicle price.

Tips to avoid paying: You may be offered a choice between a low interest loan and a cash rebate. Do the math and decipher where you save the most money. You can use Bankrate's helpful calculator to make calculations easier.

5. Buying more vehicle than you need

If you’re already contemplating a big-ticket purchase, it can be very tempting to allow yourself to be talked into this or that extra that you neither want nor need (nor can really afford). Good auto salespeople have a way of making those extras seem oh-so-affordable by wrapping them into your monthly payment, but be on your guard or you may just discover after the fact that you’re saddled with more payment than you bargained for.

Tips to avoid paying: If you don't trust yourself, bring a partner or friend along to the negotiations. Instruct them to remind you that you don't need those extras. Also, be aware that often you’ll pay the highest price for extras you buy at the dealership. If you really want an extra, price out what its aftermarket cost will be (include any costs for labor and installation). Some extras, such as a more powerful engine or a sports package, can also affect your auto insurance rates. Before you buy, call your insurer to check on how those extras may affect your rates! This is also a wise strategy when you buy a new vehicle overall. Before driving off the lot, be sure your new car is also affordable to insure.

6. Just say no to negative equity

Finally, if you drive your current vehicle onto the dealership lot owing more than it’s worth, try not to be persuaded to roll that net loss into your new auto loan. This will mean you’re now paying interest on a car you no longer even own!

Tips to avoid paying: The best way to avoid this, according to experts, is to only buy as much car as you can afford…each and every time.


For similar articles, check out:

Buying a New Vehicle? Here Are 6 Fees You Should Never Pay

Lease-Vehicle Fees You Should Never Pay

Rental-Car Fees You Should Never Pay

Auto-Loan Fees: 6 You Should Never Pay