You’ve found the perfect car and you’re ready to commit – put a ring on it, wife up, all that jazz. The next step is financing. If you have enough cash to pay for it all at once, that’s outstanding. Most of us, though, need to secure a car loan.
The length of the car loan term is one of the most basic questions you’ll have to consider. A typical car loan has terms of around 5 years, though recently some lending institutions have been offering longer terms with lower monthly payments. Low payments and a higher loan duration may be your only option. But if you can afford it, here’s a few reasons why a shorter loan term will save you money in the long run, thanks to Edmunds.
- Higher interest costs. You’ll always end up paying more interest the longer you owe money on the car. In addition, many longer-term loans have higher interest rates. You could be paying an extra $1,000-$4,000 or more, depending on the cost of the car, interest rate, and length of the extended loan duration.
- Wanting a new car. Are you the type that gets sick of your car waaaay before you can get a new one? Then why would you want to extend your financing? Rolling your loan over into your next auto loan can often lead to a longer loan commitment and higher payments. If you get restless, keep your loan term short!
- Resale value. The older a car is, the less it’s worth. Simple! Trade-in value is much better on a five-year-old car than a seven-year-old car. The difference could be even more drastic with a used vehicle.
- Equity. A new car depreciates rapidly in its first year. At the beginning of your car loan, you owe more than the car is worth. Eventually, the equity will grow – but the longer your car loan is, the longer it takes to build equity.
If you can afford the monthly payments, getting a shorter-term car loan is in your best interest. You’ll be paying way less interest and retain a higher portion of the value of the car, making it a better bet for resale once it’s time to say goodbye.