Purchasing a new car is an exciting experience and sometimes the thrill of having a shiny new car can lead you to make decisions on the spur of the moment. When you are applying for car loans, this spontaneity may not work in your favor, however. Before you come into the dealership, make sure that you understand how a car loan can affect you in the short and long term.
Auto loans used to be about three years in duration. Today more and more of these loans extend past five years. For those people who are struggling with poor credit histories, this is probably good news. People who are struggling to make ends meet, but who are in desperate need of a car will also appreciate the lower monthly payments offered through a long term loan.
There are some trade-offs, however, to purchasing a car with car loans that extend past five years.
You’ll typically find that the longer loan terms mean that you will pay a higher interest rate. This means that even though the monthly payments may be lower, you will end up paying more over time. Many car dealerships will offer you the option to make extra payments or pay off your loan early if you are able. This can help to reduce the final amount that you end up paying.
Another trade off associated with long term auto loans can be the rapid depreciation of the car’s value. The typical depreciation rate of a new car is 22 percent in the first year. With this situation, you may find that you owe more for your car than it is actually worth. However, if you don’t intend to sell your car and you are using it to get to work, then the actual worth of the car to you may be more than what the car would sell for.
If you are looking at car loans and you are finding that most of the loans you qualify for will last more than five years, then you may want to consider a less expensive car. Work with the professionals at the dealership to find a loan that allows you to drive away in a car that gets you where you need to go at a price that can reasonably fit into your budget.