Choosing the term of your vehicle financing is an important step in choosing the perfect car loan. A longer loan term lowers the monthly payment, but you end up paying more interest over the life of the loan. A shorter loan term means you pay less interest overall, but your monthly payments are higher.
This is how you determine the correct running time
When deciding on your car loan, consider the length of the loan term in relation to the price of the car and your financial situation. A longer loan term lowers the monthly rate, but may not be the best solution if you can afford a higher loan rate or don’t mind a cheaper vehicle.
Bank rate tip: It’s important to consider your budget and how much you can afford before buying a car. Pre-qualify for an auto loan with your bank or credit union before purchasing a vehicle.
To find the right term for your car loan, follow these steps:
- Determine your budget. Think about whether your financial situation is likely to change and take that into account.
- Prequalify with at least three lenders. Working with your local credit union could get you better payments, especially if you have an existing relationship.
- Compare the total interest. Take your prequalification results and plug them into a car loan calculator to see how much interest you would pay in total.
- Make a decision. Consider both the monthly rate and the total cost when deciding which repayment term is best for your needs.
Long-term versus short-term car loans
While longer credit offers the opportunity to purchase a more expensive vehicle, it means
more interest over a longer period of time. So, although the monthly payment will be lower, the total cost will be higher.
A shorter car loan, on the other hand, offers less interest paid but higher monthly costs. If your budget isn’t right or your income suddenly changes, you could struggle with those payments.
There is no perfect loan length for every driver. So, before de-registering your next car, consider the pros and cons of each.
Pros and cons of a long-term car loan
A long-term loan is a good choice when your budget can’t handle a higher monthly payment. Since your monthly payment will be lower, it might also be easier to afford a higher-priced vehicle.
But with a longer car loan, you pay more interest overall. You could end up paying well over a grand more if you opt for a longer term. A longer-term loan also increases the risk of being upside down with your credit or owing more than the vehicle is worth. This scenario can make trading or selling more complicated.
Advantages and disadvantages of a short-term car loan
While long-term car loans can mean an excessive amount of interest, a shorter term means less interest paid overall. It also means your car will be yours completely, even faster. Also, newer cars depreciate in value quickly in the first five years, so you probably won’t owe more than your car is worth for any length of time.
If your budget is tight, signing a short-term loan is a riskier choice. This is especially true if you don’t have a sizable down payment. To avoid this, stay away from expensive cars that could weigh on your budget.
Reasons for a shorter loan term
There are a few reasons to sign a shorter loan. You’ll pay off your loan sooner, which means you can take full advantage of the car you’ve bought, and you don’t have to pay off a large loan. Consider these important factors when determining the length of your loan.
Fewer years to pay
A longer loan term could mean making payments for up to seven years. A shorter term gives you full ownership of your car in a much shorter time, so you get the money back into your monthly budget and can use it to pay off higher-interest debt or save.
Your loan is less likely to be upside down
If you sell your car or need to upgrade your car, you have more flexibility to make the change. You probably won’t have more credit than your car is worth, making it easier to swap out when you’re ready for another ride.
Better resale value
Much like being less likely to have your credit turned upside down, paying off your car sooner means it’ll be worth more when you’re done paying it off. That means if your situation changes and you need to upgrade – or just want something new – you can get more for it than if you had to wait five or seven years.
The final result
It is important to consider how much car you can really afford. Aside from the total cost of the loan, consider how much you can spend on your car each month — including gas and insurance.
A shorter term may not always be an option for the car of your dreams. But if a similar model is cheaper and can put you off taking out a longer-term loan, it may be worth the trade-off. Whether you choose a longer or shorter term, be sure to compare plans to get the best possible deal.