How to Determine the Right Loan Term for Your New or Used Car
Once you've decided to finance your vehicle purchase with a loan, there are some important
factors to consider while shopping for the best deal:
- Interest Rate
- Term
- Vehicle Value
Car Buying: Loan Interest Rates
The APR (Annual Percentage Rate) of a given loan determines how high your monthly car payments
will be and how high your interest payments will be over the loan's life. Online lenders have
grown in popularity and allow consumers to shop for the best auto loan rates available.
Websites such as
HouseholdAuto.com,
MyAutoLoan.com and
DriverLoans.com
provide a time saving one-stop shop for consumers. Many online lenders have "auto loan
calculators"
on their sites that allow consumers to determine the ideal rate and loan terms (which will be
discussed later).
Car Buying: Terms (Length) of the Loan
There are two basic types of auto loans: Long-term and short-term. Lenders usually offer
long-term loans for new cars only (contingent upon your credit rating). Long-term loans are
typically 36, 48 or 60 months long; while short-term loans, which are usually available for
used cars, are 24 to 36 months in length. Long-term loans can offer lower monthly payments
while short-term loans yield higher monthly payments. The pros and cons of each will be
touched upon later.
Car Buying: Vehicle Value
The value of a car is an important factor to consider when shopping for an auto loan. Vehicle depreciation, which is particularly relevant to new cars as they depreciate quickly, should be taken into consideration when
buying a new car (or a used one for that matter). Even though a vehicle’s original value may have been greater than the loan amount at the time of purchase, depreciation can cause a car to be worth less than the remaining principle. Should you sell the vehicle, or if it’s lost or destroyed, you may less in payment insurance proceeds than the outstanding balance of your loan. The
Kelley Blue Book, used by dealers and car consumers alike, is the recognized reference for determining a car’s value and will help you make a more informed
auto buying decision.
Car Buying: Long-Term or Short-Term Loans?
More and more Americans are opting for a 60 or 72-month financing term to decrease monthly
payments and why not? A long-term loan can make a fancy
new car or SUV more
attractive to the average car buyer.
As previously mentioned, because all new cars depreciate quickly (specifically in the first
two years), it's not unusual to be "upside-down" for the first couple of years in a 60 or
72-month auto loan, which can have negative ramifications should you decide to trade your car
in for another one since your old car's debt will be rolled into a new loan.
Although long-term auto loans and lower monthly payments may seem attractive initially,
short-term loans offer lower interest rates that can lower the overall cost of your new or used car,
making the higher monthly payments more palatable.
Be realistic about what you can afford, based upon your income, credit rating and lifestyle and
avoid buying on impulse. Good luck!
