Which Auto Loan Term Is More Advantageous To You
1) Short-Term Auto Loan
Advantages: One of the biggest advantages of choosing a short-term auto loan is that the loan is paid off earlier as compared to a longer term. It will make you less debt-ridden tomorrow. It attracts lower interest rates which means you are eventually paying less towards obtaining an auto loan. A short-term auto loan will also decrease your chances of being upside down and help you to build your equity at a faster pace compared to the other options.
Disadvantages: It has a high monthly payment. A certain part of your monthly income will be tied up towards making payments for the auto loan. It can be comfortable only if you have put a good amount of money down. Down payment can help you to attain a successful completion of a short-term auto loan.
2) Long-Term Auto Loan
Advantages: As a long-term auto loan is stretched for more than 5 years, the monthly payment is relatively lower compared to a loan that can be paid off quickly. Another advantage of choosing it is the flexibility to make payments, i.e., you can refinance your auto loan and increase the monthly payment amount to pay off your auto loan early.
Do Long Car Loans Ever Make Sense
In rare cases, car loans with terms of more than five years can make financial sense. But thats only under specific circumstances, and only for diligent savers and investors.
One such case is if youre aggressively paying down debts at a far higher interest rate than the car loan in question.
If you have $25,000 in credit card debts costing you 22% in interest, and you can borrow a car loan at 4.5% interest, it makes more sense to pump all of your cash toward paying off your credit card debt, rather than using cash to buy a car outright, put down a large down payment, or make higher monthly payments on a standard-term loan.
The other case is if youre confident you can earn more by investing the money than you lose in interest. For the average car buyer, however, earning average returns and paying an average interest rate of 6.16%, this strategy offers more risk than reward.
Both of these cases revolve around one central premise: that youre taking all the money youre saving each month by lengthening your loan and putting it to work for you rather than spending it. But few people have that level of discipline.
Whats The Ideal Amount Of Time To Finance A Used Car
The industry standard for the ideal length of time to finance a used car is no more than 60 months, yet over half of all new loans are financed for 84 months. Having a five-year loan gives you sufficient time to repay the loan at a payment thats manageable, without overpaying for interest charges.
The ideal financing term for you depends largely on what you can afford to pay monthly and how long youre comfortable making payments on the loan.
If you think youd like to trade up to a newer used vehicle in a few years, for instance, a shorter term may be better. On the other hand, if you want to get the lowest payment possible, then a longer loan term could provide that.
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How Many Years Can You Finance A Used Car
Savvy drivers know buying a used car is an excellent alternative to purchasing a new one, and for plenty of reasons, too.
When you decide on buying a used vehicle, you save thousands of dollars. Thatâs because new cars begin to depreciate the second they leave the dealership lot. You can still drive off in something in great shape, even if it’s used. And with manufacturing quality continually rising over the past decades, a well-maintained used car can easily pass for a brand-new one.
If you’re like most car buyers, you’ll probably want to finance when you purchase a used car. Auto loan terms like interest, APR, and term length can be all over the map, depending on many factors like loan amount, credit history, and from whom you borrow.
What if you’d like to lower the monthly payments when you buy a used car by taking out a longer-term auto loan? Is there a limit to how long you can finance a used car?
Let’s look at auto loans in detail and how many years you can finance a used car.
Why You Should Avoid Long
Long-term auto loans are becoming more popular as people look for options to get them into the cars they really want. Loans that stretch 84 monthsor even longerare increasingly common. But is getting a long-term auto loan really a good idea? There are several reasons why taking out an auto loan of 84 months or longer may not be a smart financial move. Here’s what to know.
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You’d Have More Money To Invest
The smaller payments with an 84-month auto loan theoretically free up money you could put toward other uses.
The idea makes sense if you feel confident your investments will net you a higher return than the interest on the loan.
But dont let the mere possibility fool you into choosing an 84-month car loan. If you dont actually invest more, then youre just suffering the downsides of a longer loan for no reason.
Why You Should Avoid Car Loans Longer Than 5 Years
Consumer debt is awfully tempting. Creditors offer you instant gratification: You get what you want right now, and you dont have to pay for it until later.
Consumer debt begets more debt, however. The interest keeps coming, even as you keep spending beyond your means.
Its a vicious cycle, and particularly damaging for vehicle expenses because they make up the second-largest expense for most Americans, according to the Bureau of Labor Statistics.
Before you accept that hyper-long-term car loan, consider the following reasons to keep your auto debt at five years or shorter.
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What Are Some Reasons People Choose Longer Loan Terms
Some people choose longer loan terms because it allows them to make smaller monthly payments. Even though the payments are spread out over a longer period of time, each payment is more affordable. Let’s say you are financing a $30,000 car over five years at 3 percent APR with no down payment and no sales tax. Monthly payments would cost $539 per month. If you decide to pick a seven year loan, you would now make payments of $396 per month. This $143 difference can make a significant impact on your monthly budget.
Even though a longer loan term is more affordable each month, you’re making more payments during the duration of the loan period. A seven year loan requires 84 monthly payments, while a five year term only requires 60 payments. The longer a loan term, the more you’ll pay in interest, according to Credit Karma.
You May Need Repairs While You Still Have A Loan
You may also have to pay for repairs at some point while paying down your seven-year loan. This is because many new cars come with basic warranties that span four to five years and powertrain warranties that last five or six years. If your warranty expires before you pay off your car and something goes wrong, you may need to pay for those repairs on top of your car payment.
That said, many people do choose longer loans. For example, 42.2% of used-car shoppers took out 61- to 72-month loans, while 18.1% extended their terms between 73 and 84 months, according to 2018 data from the credit bureau Experian.
If you bought a 5-year-old car with an 84-month loan, your car would be 12 years old and could need some sort of repairs by the time you paid it off.
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Owing More Than A Car Is Worth
The longer you own a vehicle and the more miles you put on it, the less it’s worth. During any loan period, a car is depreciating in value. However, long-term loans can actually cause you to pay more for your vehicle than it is worth.
Negative equity is when you owe more on a loan than the property the loan is helping pay for. This is also known as being “underwater” or “upside down.” In the first year, a car’s value can depreciate by 20 percent to 30 percent. Once you add in interest, Autolist says that this depreciation can lead to a negative equity cycle.
Should I Extend My Loan Term When Refinancing My Car Loan
When evaluating refinance offers, dont forget to compare loan terms in addition to interest rates. If you can, try to get a lower rate and keep the same loan term. That way you save both monthly and over the life of the new loan.
Depending on your cars age and how far you are into your current auto loan, your lender may or may not give you the option to lengthen your loan term. However, if you do decide to get a longer term, paying extra toward principal every month can keep you from going too far upside down on your loan.
Do the math to see how much youll be saving with each option provided.
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How Is The Length Of A Car Loan Determined
The length of a car loan will depend on the person taking out the loan and their individual circumstances. There are a lot of different things at play when a dealership or bank determines the terms of a loan and many of them will have to do with your specific financial situation. Knowing what these factors are can help you get the best possible loan terms for you and your needs.
Down Payment: The amount you can put down on a car will have a lot to do with the length of the car loan. The more you can knock off the sticker price before you even sign the papers for the loan, the shorter that loan will be. This can allow you to make fewer payments and gain full ownership of the car faster.
Monthly Payment: Your monthly payment amount will also determine how long you will have to make those payments. If you can afford to pay a larger percentage of the total loan monthly, you can reduce the amount of time you owe the loan. This can also help you pay less in interest over the course of paying off the vehicle.
Interest Rate: The interest rate you qualify for will have a lot to do with the final cost of the vehicle. If you dont qualify for a lower interest rate, the total loan amount will end up being much more. This can add months to your loan term. In turn, you will also end up paying more in interest throughout this longer loan. This cycle is how people end up paying much more for a new or used vehicle than they should.
What Is The Maximum Car Loan Term
In the market for a new car loan? Depending on your budget and personal financial circumstances, you may be wondering what the maximum car loan term is that you can apply for.
Generally speaking, most car loan providers offer a maximum term of up to 7 years in Australia. Borrowers commonly tend to apply for loans in the 2 – 3-year range.
But there are a few car loan lenders offering longer car loan terms. As of writing this, there are four lenders offering maximum car loan terms of 8 years, and one offering a maximum car loan term of 10 years.
High car loan terms
| Max Loan Term | Minimum Loan Amount |
|
$10,000 |
But while a 10-year car loan may sound like a competitive deal, its worth keeping in mind there are risks associated with longer term loans.
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Risk Of Negative Equity
When you owe more than your car is worth, youre upside-down on your loan. Put another way, you have negative equity.
This is a real risk when you take out a car loan with a term of six, seven, or eight years.
Negative equity means coughing up the difference if you want to sell the vehicle. If after five years you still owe $10,000 on your loan, but your car is only worth $7,500, you may not have $2,500 to make up that difference.
You might need to eat the cost if you need to replace the vehicle. Your needs might change for example, if you have a child or move to an area where you need four-wheel drive for snowy or muddy roads.
For that matter, if you get into an accident and the insurance company writes off your car as a total loss, they pay the value of the vehicle, not your loan amount, which means youre on the hook for the difference.
Although there are a few strategies to get out of a car loan when youre upside-down, youre better off avoiding that situation in the first place.
Theyre More Costly In The Long Run
With all the 84-month financing offers floating around, you might think youre doing yourself a favor if you take only a 72-month loan.
But the reality is youll spend thousands more over the life of a six-year loan versus even just a five-year loan, according to the Consumer Financial Protection Bureau.
Lets say you finance $20,000 at 5% for five years. After three years, youll have paid $2,190.27 in interest and youre left with a remaining balance of $8,602.98 to pay over 24 months.
But what if you extended that loan term with the same interest by just 12 months and took out a six-year loan instead?
After those same three years pass, youll have paid about $152 more in interest over 36 months, plus youll have a remaining balance of $10,747 to tackle over the next 36 months.
So the net effect of selecting a 72-month loan is that youll pay some $2,000 more!
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What Is An 84
Essentially, theyre the same as any auto loan. An 84-month auto loan stretches the repayment period to seven years. Your lender amortizes your loan over this term to determine how much you pay each month in principal and interest.
For example, consider a $20,000 auto loan with a 3.49 percent interest rate. If you were to opt for a 60-month repayment term, your monthly payment would be $364. Extend that term to 84 months, though, and your monthly payment would drop to $269.
But that 60-month term would only cost you $1,825 in interest. Since theres more time for interest to stack up, an 84-month term is naturally more expensive: Youll wind up paying $2,571 nearly $750 more.
Drawbacks Of Long Car Loan Lengths
Alongside the advantages of long term loans, there are a few drawbacks to keep in mind.
- Long loans have more time for interest to accrue, and they tend to have higher interest rates overall.
- The longer-term means your vehicle will likely depreciate before you pay it off, and you might have to pay more than its worth.
- Theres more opportunity to default on the loan, possibly resulting in the seizure of your vehicle.
Because of these drawbacks, a longer loan term is usually not considered ideal.
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How To Make The Most Out Of A Long
A low monthly payment may be the best option to keep your car loan affordable. In that case, there are a few tactics to make the most of a long loan term.
- Invest in a quality vehicle. The fewer repairs your car needs, the less itll cost you and it could minimize depreciation.
- Make a large down payment. The larger your down payment, the lower your principal will be and the less youll pay in interest.
- Work on other debts. If you have high-interest debts, opting for a low monthly payment so you can prioritize these can help your finances.
- Refinance when you can. You can save on your loan by refinancing once you have the monthly cash flow to afford a shorter term.
If You Want To Pay Off More
Another instance that may warrant an 84-month auto loan is if you have other debt at higher interest rates than your potential auto loan. You might want a lower car payment so that youll have more money at your disposal each month to pay down that other higher-interest debt, which could potentially save you money in the long run.
An 84-month auto loan may allow you to save extra money that can be used to pay down your higher-interest debt. For example, if you finance a $20,000 car over a five-year term at a 4.5% annual percentage rate, with no down payment , your monthly payments would be $372.86. If everything remained the same yet you chose a seven-year term, youd pay $278, or about $95 less per month.
Lets say you owe $15,000 on your credit card with a 25% APR. You could use that extra $95 a month to pay toward your credit card balance and potentially save on overall interest for your debts.
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Your Warranty Will Expire First
A big selling point on new vehicles is the warranty that covers repairs in the early years.
However, most warranties don’t last seven years, and as your loan ages, your vehicle will probably need repairs that are more involved and expensive.
That means you’ll be paying for repairs out of your own pocket while you’re still paying for your car.
And if you buy a used car, the odds that it will need serious repairs before the end of an 84-month loan are even higher.
For example, if you purchase a five-year-old car with an 84-month loan, itll be 12 years old by the time your loan is fully paid off.
Even if you spend a bundle on repairs, theres a chance that your five-year-old car will eventually be undrivable before your 84-month loan term is up.
