Short-Term Auto Loans: How Much Can You Save?


Shopping for a new car involves many important choices. Once you’ve decided on the exact vehicle that’s best, which is certainly no small feat, the big decisions aren’t over. One of the most important decisions is still to come: how to finance it. Whether you seek a loan from the dealership itself or from your financial institution, you have to decide whether a long-term or a short-term loan makes more sense for your current and future finances.

In recent years, the typical term for car loans has been getting longer and longer. The allure of long-term car loans is easy to see. It’s a result of the fact that it is easy to score lower monthly payments when you stretch the loan repayment process over a lengthy term. This makes people feel like they are getting a great deal on a new or used car.

Once you’ve decided on the exact vehicle that’s best, which is certainly no small feat, the big decisions aren’t over. One of the most important decisions is still to come: how to finance it.“The problem with long-term loans is that they come with increased interest, which in other words is the extra money you have to pay the [financial institution] for giving you the loan,” says AutoTrader.com. “So while a lower monthly payment might seem like it’s benefiting you, it’s usually a worse decision.”

Despite this downside, the seduction of lower monthly payments is hard to ignore, and the recent trend of picking long terms for repayment doesn’t seem to be going away anytime soon. If anything, lower monthly payments seem to be gaining popularity.

“In the first quarter of 2015, the average term for a new-vehicle loan was 67 months— more than five years,” states John Rosevear, contributor on DailyFinance.com. “The average term for a used-car loan was almost as long, 62 months. Until recently, such long-term loans for cars were very rare.”

Digging below the surface reveals that the popularity of long-term loans isn’t just an attempt to save money. People who choose these loans aren’t always just trying to minimize monthly payments. They are also seeking to maximize how much car they can get for the payment that they are comfortable with.

“Here’s what’s driving the trend: People are buying more expensive cars,” states Rosevear.

Cars can’t truly be considered an investment, because owners rarely make money when they sell their used car. So, trying to get the most expensive car possible isn’t a sound financial decision unless you can afford it comfortably with enough money left over for the other expenses in your life.

“If you really care about building financially security, you would never take out a car loan greater than 36 months,” states financial guru Suze Orman on CNBC.com “Will that mean buying a less expensive model? Of course. That’s the point! You should want to spend the least amount possible—and get out of debt fastest—on a purchase that is bound to lose your money.”

While Orman’s advice to stick to the shortest term possible certainly helps you save money on interest, there are a few cases in which paying more over a long-term loan could be worth considering. First of all, it is necessary to have credit that is good enough to score a very low interest rate. Furthermore, the car you are buying has to be one that you want to drive for a long time, because you will be paying it off for many years to come.

“So if a longer-term loan helps you buy a car you’re willing to keep for a longer time, it might actually make good sense in the long run,” states Rosevear.

So, make sure to calculate the total price, not just the monthly payments, when you are shopping for a new car and a loan, and that will help you make the best decision. Also, be sure that the car you buy is a car that will serve you well for many years to come.

 

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