Should You Get a Short- or Long-Term Car Loan?


Buying a new car? Congrats! If you’re planning to use an auto loan to finance your new purchase, as most people do, you’ll need to consider a few things beforehand — like whether to attain a short- or long-term loan.

If you’re planning to use an auto loan to finance your new purchase, as most people do, you’ll need to consider a few things beforehand — like whether to attain a short- or long-term loan.When attaining a car loan, most buyers tend to focus solely on the purchase price, and not necessarily the overall conditions of the loan. But determining the right car loan length is just as important as the number value in which you’ll pay.

“The big mistakes are made in the financing office,” says Phil Reed, the senior consumer advice editor at Edmunds.com, the auto research website. “Making the right decisions can save thousands over the life of the loan.”

So how do you know whether to go for the short- or long-term car loan? For starters, determine how long you plan to keep the car. For example, if you’re someone who replaces car after car, and you know you’ll be doing the same, then you might be better off with the shorter-term loan. With a vehicle’s resale value decreasing pretty rapidly, you might owe more than the car is worth in the end if you trade in the car early.

In addition, you’ll have to take into account that the length of your loan directly affects your interest rate.

“A shorter-term loan pays off the car faster and helps you pay less in overall interest costs,” explains Allison Vail, a spokeswoman for LendingTree.com.

On the other hand, a short-term loan means higher monthly payments. In some cases, a longer-term loan means your monthly payments could be cut in half. However, if you were to double the length of the loan, you’d likely incur a higher interest rate, which would make the loan cost even more in the long run.

“It doesn’t mean it’s more affordable, it just means you can afford the monthly payments,” says John Ulzheimer, president of Consumer Education for Credit.com.

Long-term loans are a good option for those who are well off in the financial department, but aren’t sure exactly about where their future is headed. In this case, a long-term loan with the lowest interest rate would be beneficial.

If you’re planning to use an auto loan to finance your new purchase, as most people do, you’ll need to consider a few things beforehand — like whether to attain a short- or long-term loan.“That way, you can pay off the loan aggressively, but if you lose your job or other emergencies arise you will have some leeway,” Ulzheimer says.

In 2009, the average loan length was in the mid 60-month range, according to Art Spinella, general manager of CNW Marketing Research, who also stated that many lenders are looking for larger down payments and shorter loans.

The credit market is tight, with the average credit score being around 710, so if you don’t have very high credit score, it could be even more difficult to get a long-term loan of more than 60 months in addition to a good interest rate. Nonetheless, the retail lending industry has increased its number of seven-year loans, which may not fit the bill for everyone.

Longer than usual loans are also usually coupled with high interest rates, meaning that by the time the car is paid off, the vehicle’s life expectancy is usually at its end, too. It’s important to note that the average car’s life is 9.4 years, and a truck’s life is 7.6 years.

“If you have to finance something for over 60 months, you shouldn’t be buying a car, or you should be getting into something cheaper,” explains Ulzheimer.

On the contrary, financing a car for over 60 months might be a good choice if the car has a particularly respectable resale value and has high reliability ratings, such as Honda, Subaru and Toyota.

When deciding on getting a short- or long-term car loan, weigh the pros and cons to find out which would work best for you. Be sure to stop by one of our banking centers and speak with a representative today to see what options we have for you.

 

Related Articles

Leave a Reply