Archive for May, 2015

What Length Should My Car Loan Terms Be?

blog_BlueSky-Finance_How-Long-Should-Terms-Be

When you go looking for a new car, one of the first things you should consider is how to structure your loan terms. Many people go for the lowest

monthly payment, even if it means a longer loan term. According to Edmunds.com, 62 percent of car loans last year were for terms of over five years. This is not always the best solution. There are many factors to consider when applying for an auto loan, and almost all of them figure into
the overall length of repayment.

 

Monthly Payments

When people shop for a car, most think they are being smart by working out their budget. Unfortunately, the way in which they approach this all-important idea is not always the best. For many, the first thing they consider are their monthly finances — how much more each month can they afford to pay?

This is certainly valid; most of us deal with bills on a monthly basis. The problem is if that’s your only guiding star. You could very well end up in over your head when you buy a car that you can’t afford, even if the monthly payments seem sound.

 

Interest

Consider: if you can only pay $250 a month, and you have a choice between an economy car that will let you pay that out over four years, and a luxury sedan or SUV which will cost you that over eight years, which is better? Far too many people go for the sedan or SUV, thinking that if they can afford the luxury they should, or believing that the high-end car will hold its value longer.

The truth is, the longer you pay on a vehicle, the more you are going to pay in interest. Edmunds reports that the difference between a 5-year and 6-year loan in interest alone can be over $4,000! That’s a difference of only one year in the cycle of the loan, all in interest.

 

Depreciation

The longer you own a car, the less it is worth and consequently, the less you can get when you go to trade it in on a new model. In addition, the longer your loan terms, the longer it will be before you can get your head above water and actually build equity into your car because of the increased interest. If you go too long, it won’t be worth the trouble. Your car will be worth too little and you will still owe more than it is worth.

 

Go Smaller, Go Smart

In the end, if you have a choice between a more affordable vehicle at a shorter term, you should go for that. The less time you are paying on a car loan, the better off you will be.

In general, it is recommended that you not go beyond 60 months (5 years) for your vehicle loan. The choice you make may not be your dream car, but love at first sight burns out fast anyway and you might grow to love your second choice even more.

If you need a car loan and you have non-ideal credit, we can help. Give us a call to consult today!

 

 

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