A few years ago, the standard loan term was sixty months. Currently, lenders offer 72-month terms. Few automobile purchasers have received 98-month loan terms. If you are shopping for a used vehicle and are in the market for a car, lenders will offer you longer terms and lower monthly payments. Due to your overstretched budget, you might view this as a viable alternative. Using a low household income, you are already responsible for a number of payments. Moreover, longer terms may appear to be the only affordable option.
However, you could not be more wrong. The following arguments will help you comprehend the reality of longer-term loans.
1. You incur Greater Interest Expenses
When you choose a longer loan term for a used car loan, you end up paying more in interest than when you choose a shorter term. Consider an example of this.
Scenario - 1
Auto Finance - $10,000
4% Interest Rate
Loan Duration - 4 Years
Monthly cost is $225.79
Interest Total - $837.95
Scenario - 2
Auto Finance - $10,000
Interest Rate - 4%
Loan Duration - 7 Years
Monthly cost - $136.69
Interest Total - $1 481.80
Therefore, if you wish to save a substantial amount of interest, you should choose shorter loan terms. Do not be deceived by a low monthly payment. It is simply the lender's way of attracting customers and making more money.
2. Shorter Lifespan of Used Automobiles + Lengthier Loan Term = Greater Problems
One more reason exists for selecting a shorter term when purchasing a used car. Used automobiles have a shorter lifespan than new automobiles. Therefore, selecting a longer term will result in an upside-down auto loan. You will owe more on the automobile than it is worth. This circumstance can be problematic when selling or trading a vehicle. It will also be problematic if the automobile is destroyed in an accident.
Now, when you choose a shorter term, your monthly payments will be slightly higher. To reduce higher monthly payments, the loan amount must be decreased. Here's how to proceed:
a) Utilize your savings for a smaller down payment, or
b) Sell your old vehicle or
c) You may select a vehicle with a lower price.
Understandably, making higher payments can be an inconvenience, but remember that a temporary inconvenience is preferable and more affordable than a permanent loss.
So, keep in mind to select shorter loan terms when shopping for a car loan."""