Experian’s Automotive research arm revealed in September that the average car loan term is 68 months during the second quarter of 2016. Still, there are car loans whose terms go beyond that. For sure these buyers have seen something good in going for longer loans as there are some things to consider when taking them out.
Upsides of Long Term Loans
The greatest appeal a long-term loan has is its affordability. When you take out a long term car loan, you effectively extend the repayment term and make the payment more affordable. At low monthly payments, you can buy a car, an expensive one at that.
You can easily fit each monthly payment into your budget. And because you are going to pay it back for a long time, you can afford to be current on your loan.
Its very length, however, can be its disadvantage. You’ll run the risk of being upside down in your loan. This happens when you owe more than what your car is worth. When getting your loan, you may have made a low or no down payment on your car.
You see with longer-term loans, a large chunk of the monthly payments during the early life of the loan goes to the interest. With less going to the principal, there is a slow buildup of equity.
Being upside down poses a number of problems such as:
- When you sell the car, its selling price won’t be enough to pay off your car debt.
- When you get into a car accident, the insurer will pay based on the value of the car, not on the cost of the loan.
There’s also the problem of depreciation. Did you know that you begin losing the value of your car the moment it leaves the dealership? And it continues to shed off its value, putting in more mileage as you go on with your car loan term.
Other Car Loan Term Options
When you shop for a new car, work within your budget. If the monthly payment is too expensive that you have to ask for a longer term to afford it, then maybe it’s not for you. This could only mean paying more in interest, making the loan expensive in the long run.
But if you go for a shorter term loan, you’d be paying more in principal. It requires higher loan payments, making it faster to be repaid. You build equity faster with shorter-term loans, an edge when you trade in your car.
Buying a used car is also a consideration. Although rates are relatively higher on used car loans than on new car loans, the amount to be financed is lesser.
Putting a sizeable down payment avoids being upside down. Some would wait for a while to save for their down payment.
A longer-term loan certainly has its perks as well as risks that make it not for everyone. In any car loan term decision, consider what you think is best for you going forward.