Buying a brand-new car is a significant investment for many. As a result, auto enthusiasts often turn to long-term financing to split the cost over time. However, the process is not simple, as this type of car loan comes with a share of benefits and drawbacks. It is important to be aware of these factors before deciding to finance the vehicle. To begin, carefully examine the advantages and disadvantages associated with a long-term car loan.
Long-term car loan vs leases
One must understand that both the finance options are different. A loan allows one to become the owner of the car at the end of the term when all payments are complete. On the contrary, a car lease is a contract that allows one to drive a car for a set period, usually 2–4 years, in exchange for monthly payments. As the lease ends, the car has to be returned to the dealership or leasing agency. One can also pay the balance amount to purchase the car or upgrade to a new automobile on a new lease.
Benefits of long-term car loans
Car loan tenures typically range between 60 and 84 months, with some lenders extending their offerings to periods as long as 96 months. Opting for a long-term car loan can provide several advantages, including lower monthly payments that may ease the financial strain and increase flexibility in managing one’s budget.
Lower monthly loan payments
The interest cost on a long-term car loan is high, but that makes the monthly payment more affordable. The balance is split over a longer period. A long-term loan might be more manageable and leave one with a buffer in the budget for emergencies.
Lower downpayments
A loan with a longer term may also come with smaller downpayment requirements. This means that one does not have to pay much upfront to purchase the car. However, it’s important to remember that a lower down payment results in a higher loan amount, which will also increase the interest charges over time.
Higher loan amount
A lender is usually willing to offer higher loan amounts because the lower monthly payments reduce the pressure on one’s budget. The larger loan amount can also decrease the likelihood of defaulting on payments. On a side note, even if a lender approves the borrower for a higher loan amount, one must borrow what is truly needed so that it can be comfortably paid back through easy installments.
Disadvantages of long-term auto loans
Although it’s certainly possible to drive home one’s dream car with a long-term loan, there are some caveats that one needs to consider to make an informed decision.
Higher interest
A long-term loan is typically seen as a risky option, which often leads lenders to charge higher interest rates. As a result, the borrower ends up spending more time paying off the interest at the beginning of the loan period before they start reducing the principal. This can eventually increase the overall cost of the purchased car.
Higher total loan cost
A long-term auto loan comes with higher interest rates and a longer repayment term. Both these factors can drive up the total outstanding loan cost. For comparison, a car loan amount of $35,000 at 9% APR over a term of 48 months amounts to a $871 monthly payment. That’s a total interest of $6,807. The same amount and APR rate over 84 months would render lower monthly payments of $563 but spike up the total interest to $12,302.
Longer and exhaustive timeline
The longer the car loan, the more time it takes to completely own the car without any financial ties to the lender. Additionally, with a long-term loan, the payments toward the principal are smaller and stretched over a couple of years. As a result, it would take longer for the balance to reduce, which may further increase the probability of the car’s value to drop below the amount owed. This negative equity might make it challenging to sell the car while still paying off the loan.
Long-term vs short-term auto loan
People often search for keywords like “should I get a long-term car loan” on a search engine, especially when a short-term loan has lower interest rates. A long-term car loan is ideal to make monthly payments more affordable with less upfront cash. On the contrary, short-term car loans are beneficial if one wants to save the most money on their next car purchase and can afford a higher monthly payment. If one takes a long-term auto loan, they would have to pay more interest in the long haul. So, one needs to consider these options to make a sound financial decision.
Estimating long–term loan repayments
One might often wonder how long is too long for a car loan, especially considering the higher interest rates. To find a comfortable tenure, one could use a long-term car loan calculator, usually available on most lender websites. The tool can help one enter an estimated interest rate and loan amount to determine the total loan cost and see how much one would spend with different terms. The calculator is great for looking at a comparison between different car loan term lengths.
The importance of a credit score
If one plans on taking out a car loan, focus on maintaining a healthy credit score. Lenders may not approve long-term auto loans for individuals with poor credit history. Even if the loan is approved, it may come with high interest rates and other associated fees. However, this is subjective, and one should speak to a lender directly to discuss their financial options. Another approach to increase the chances of qualifying is to take time to improve the credit score, as this can help secure lower rates.
