One of the most basic rules of borrowing is: do not borrow more than you need. And yet, more people are squandering dollars in auto loans, without thinking about long term sums.
A recent study by credit-reporting agency Experian revealed that auto loan amounts today are at an all-time high. Typically, you can borrow as much as $30,000 on average for a brand new model while you can get financing at $19,329 for used vehicles. Borrowers are also extending their terms. And for what purpose?
The average vehicle usage climbed up throughout the years. More people are keeping their vehicles longer. But another reason for the longer term is borrowers’ preference for more expensive models.
It’s easy to get swayed with the sales talk. Remember that the low monthly payments is the result of an expanded loan term. Throughout this term, you are paying interest on the loan, hence the longer you hold the loan, the more expensive it will cost you.
If you are getting an auto loan with a longer loan term, you might want to rethink your decision. Look into these risk factors and decide whether the decision is still worth pursuing.
The Risk of Going Underwater
Cars depreciate fast. It can lose a quarter of its value after only a year of buying it. Given how most car loans are structured wherein most of the principal is paid only during the later part of the term, you can get underwater if you decide to sell during the first few years of ownership. Your payment can’t keep up with the pace of depreciation. Consider this when you plan to get financing for your car especially when you plan to keep it for only a few years.
Potential Length of Ownership
Potential life changes may affect your future living setup. For example, if you plan on having more kids in the near future, it might be wise to factor that into your decision of getting a model that caters to more passengers. If your work requires long commutes and travel time or aggressive usage that might affect your vehicle’s wear, the vehicle may not last longer than you anticipated. Or, you simply don’t want to hold a car for that long. Whatever your conditions are, there will always be things to consider when calculating the ideal term for your auto loan.
The Risk of Cost
As in any other loan, your interest rate is dictated by your credit score. The higher your credit rating is, the lower your interest rate will be. If you have good credit, you can get access to car loans with near zero interest rates. That’s when getting the loan with the longer term could potentially make sense. Otherwise, taking out an auto loan with a longer loan term will cost you a fortune. Some lenders especially in the deep subprime market can charge rates as much as 15 percent. If this is your case with no other option in sight, you might want to opt for a shorter term to save on the overall cost.