Choosing the term to finance your vehicle is a key step when it comes to choosing the perfect car loan. A longer loan term will lower the monthly payment, but you’ll end up paying more interest over the term of the loan. A shorter loan term means you’ll pay less interest overall, but your monthly payments will be higher.
How to determine the right tenure
When deciding on your car loan, consider the term of the loan in relation to the price of the car and your financial situation. A longer loan term will lower the monthly payment, but it may not be the best solution if you can afford a higher loan payment or don’t mind a cheaper vehicle.
Discount Rate Advice: It’s important to consider your budget and how much you can afford before buying a car. Get pre-qualified for an auto loan from your bank or credit union before buying a vehicle.
To find the right term for your car loan, follow these steps:
- Determine your budget. Determine if your financial situation is likely to change and take this 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 an auto loan calculator to see how much interest you’d pay overall.
- Take a decision. Consider both the monthly payment and the overall cost when deciding on the best loan term for your needs.
Long-term or short-term auto loans
Although a longer loan offers the possibility of buying a more expensive vehicle, it means
more interest over a longer period of time. So even if the monthly payment will be lower, the overall cost will be more expensive.
A shorter car loan, on the other hand, offers less interest paid, but a higher monthly cost. If your budget isn’t on track or there’s a sudden change in your income, you might find yourself struggling with these payments.
There’s no perfect loan term for every driver, so consider the pros and cons of each before signing on for your next car.
Advantages and disadvantages of a long-term car loan
A long-term loan is an excellent choice if your budget cannot cover a higher monthly payment. Since your monthly payment will be lower, it could also make it easier to buy a more expensive vehicle.
But with a longer auto loan, you’ll pay more interest overall. You could end up paying well over a grand more by choosing a longer term contract. A longer term loan also increases the risk of finding yourself upside down on your loan or owing more than the value of the vehicle. This scenario can complicate the trade or sale.
Advantages and disadvantages of a short term car loan
Where long-term auto loans can mean an excessive amount of interest, a shorter term means less interest paid overall. It also means that your car will be completely yours even faster. Along with this, newer cars depreciate at a rapid rate in the first five years, so chances are you won’t owe more than your car is worth for an extended period of time.
If your budget is tight, taking out a short-term loan is a riskier choice. This is especially true if you don’t have a large down payment. To avoid this, stay away from expensive cars that can strain your budget.
Reasons to consider a shorter loan term
There are a few reasons to take a shorter loan. You’ll pay off your loan sooner, which means you’ll be able to fully enjoy the car you bought and won’t have a big loan left to pay off. Consider these key factors when deciding on your loan term.
Fewer years to pay
A longer loan term could mean making payments for up to seven years. A shorter term will put you in full possession of your car in a much shorter amount of time, meaning you’ll get the money back into your monthly budget and can use it to pay off interest rate debts higher or save.
Less likely to be upside down on your loan
If you need to sell your car or upgrade your car, you’ll have more flexibility to make the change. You probably won’t have a balance that exceeds the value of your car, making it easier to trade in when you’re ready for another ride.
Better resale value
As if you were less likely to lose your loan, paying off your car sooner means it’ll be worth more when you’re done paying it off. This means that if your situation changes and you need to upgrade – or if you just want something new – you can get more than if you had to wait five or seven years.
The bottom line
It’s important to be aware of how much car you can really afford. Aside from the overall cost of the loan, consider how much you can spend on your car each month, including gas and insurance.
A short term isn’t always an option for your dream car. But if a similar model is cheaper and can save you from taking out a longer-term loan, it may be worth the trade-off. Whether you go for a longer or shorter term, be sure to compare rates to get the best deal possible.