When It Comes to Car Loans, Shorter Is Often Better

When It Comes to Car Loans, Shorter Is Often Better

A longer-term loan can make even the most expensive car look affordable.

By stretching out the loan over many years, your monthly payment is likely lower, but you could end up paying a lot more in interest. Still, many people find such loans attractive.

The average new car loan was over 71 months at the end of 2020, according to Edmunds.com. Almost 32% of vehicle loans made in the first quarter of 2021 were for 73 to 84 months (6 to 7 years), according to Experian.

That's well above the standard three- to four-year loan that used to be typical for new car purchases. Here are some of the problems with taking out a longer car loan:

•       The longer the term of the loan, the worse your interest is likely to be. Shorter-term loans generally qualify shoppers for a better interest rate.

For example, say you want to finance a $28,000 car at 8% sales tax, with a loan rate of 3.5% for 60 months, and a trade-in worth $5,000. You will end up paying $2,310 in interest over the life of the loan. Compare that with a 72-month loan. Your interest rate will jump, likely to about 6%, and you’ll end up paying $4,878 in interest.

•       There's a greater chance you'll end up underwater, meaning you will owe more to the lender than the car is worth. Cars depreciate as soon as they leave the lot, and for the first three years, most cars are worth less than what is owed on the loan. Without a substantial down payment, if you total the car or need to sell it within the first three years, you could end up receiving less than you owe on the loan.

•       You're stuck with the car when it begins needing expensive maintenance. If you want to buy a newer vehicle, you likely won't be able to trade in your old car because the remaining balance on what you owe on the car is higher than what the dealer is willing to pay for it.

If you need a longer car loan just so you can buy the car, you probably can't afford the car in the first place. Try to keep the length of your car loan shorter to save money.

Before you go shopping for a vehicle, visit ICCU to get preapproval on a loan. The loan officer will figure out exactly how much you can comfortably afford, at the best rate.

ICCU can also help you If you already have an auto loan from another lender. We can help you refinance to a shorter term and more affordable payment.

Isabella Community Credit Union ∙ 989∙773∙5927