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How Long Should My Car Loan Be?

Edmunds.comEdmunds.com Posts: 10,059
edited April 2017 in Editorial
imageHow Long Should My Car Loan Be?

A longer car loan may have lower payments, but will it save you money in the long run?

Read the full story here


Comments

  • karhill1karhill1 Posts: 163
    Many people could benefit from a loan with a long pay off period.

    If an OEM offers a loan for 36 to 60 months at 1.9 percent, or perhaps zero percent, it may be best to take the 60 month loan. With a bit of discipline a person can always pay the loan off early with no penalty.

    Having a lower required payment or having required payments which are made in advance can be very helpful should a short term monetary situation develop.

    The amount of equity a person has in a vehicle is dependent on the amount of money a person has paid on the down payment or payments made on the financed amount. With a low interest rate, it really makes no difference whether the equity is paid up front or later.

    For some folks having the cash available, which would have been used to make a large downpayment on a vehicle, can be very useful as the interest on auto loans is typically far less than the interest rates available elsewhere. A person could use the money saved from the large down payment to pay off other high interest debt.

    Each person's situation is unique and there is really no single financing rule for car purchases.
  • texasestexases Posts: 8,976
    Boy, this sure attracted the SPAMMERS! There's a big difference between 'can' and 'should'. To keep one's finances under control, short loans (36 month or so) and long car ownership (10 years or so) are best. Combine that with a 20% or so down payment, and folks won't be under huge financial pressure. They also won't be driving the 'car of their dreams', probably, but that's ok. Really, it is!
  • kyfdxkyfdx Posts: 137,855
    Yeah.. wonder what they search for to find finance discussions... weird.

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  • jraserojrasero Posts: 12
    There are such things as 6+ loans but I would highly advise from taking one of these. Instead 5 years max. Also try to take a 36 month or less loan. A lot can happen even in 3 years. Also the general rule is 20% down but if you want lower payments or enjoy trading in and getting a "new" car paying a larger down payment upfront will allow you to create equity faster thus allowing you to get out of your old car quicker.

    There are instances where taking a 6 year loan makes sense. One being 0% financing. In a situation with 0% APR you could pay more than your monthly when you choice to payoff the loan faster.

    An alternative to long term longs would be leasing. Now with leasing you have to drive 15k or less a year and take very good care of the car maintenance and cosmetically. If you fit this bill leasing with little or zero down can get you into a brand new car for less a month compared to financing. The long term option of the lease would be turning in the car and getting another 24-36 month lease or buying your end of lease car for the residual value. Now leasing a car and then buying it always will be more money than straight financing it but this allows you to keep your cash flow under control.

    Lease
    2016 RDX AWD Base
    Negotiated price $35,500
    $3300 down
    45k 36 Months
    Tax (NYC) tags wrapped in= $366 Month

    +

    Buy back lease after three years
    2016 RDX AWD Base
    Residual/Buyback= $23,300
    $11,000 down
    2.45% APR 36 months=$431 Month

    Leasing and buying lease 6 year cost= $42,626

    Buying
    2016 RDX AWD Base
    Negotiated price $35,500
    20% Down $7100
    1.9 APR 72 Months
    Taxes (NYC) tags wrapped in= $472 Month
    Total for 6 years= $41,084

    So leasing for 3 years, then financing for 3 years is a little more than $1500 more compared to straight 6 years of financing with 20% down. $1500 is still a good chunk of change but over 6 years that's only $250 more a month. Also, when buying your leased car you have the potential to avoid millage overages and damage charges and you know 100% the cars history compared to buying used. Obviously these numbers are unique to my location and situation, but this could be applied to most cars.
  • isellhondasisellhondas Issaquah WashingtonPosts: 20,225
    36 month car loans used to be the norm. Then they crept up to 48 months. Some froends of my parents bought a new T-Bird when I was a kid and financed it for 48 months. My parents thought they were nuts.

    Now, 60 month loans seem to be the norm with some people financing for 72 and even 84 month loans!

    To me, they are buying cars they simply can't afford. I used to try to talk people out of these long term car loans but they wanted it all! They HAD to have the top of the line model with every unnecessary option and the only way they could afford the payments was to stretch out the payments.

    I suppose since cars last so much longer these days it's not as bad as it once was.

    I still remember that T-Bird was pretty shot after those four years and 80,000 miles. Back in the 60's, if a car went that long without major work it was unusual.
  • steverstever Posts: 52,462

    I suppose since cars last so much longer these days it's not as bad as it once was.

    That's about the only saving grace but I really hate the idea of car payments. At least with my house, there's a chance I'll get some of my payments back some day.
  • TitleLoanscTitleLoansc 3420 US-21, Fort Mill, SC 29715Posts: 6
    Hy,
    The main reason is that if you wants to paying long term car loan. you 'll pay more interest of it.
  • Great topic. What most people dont understand is how contracts work . Yea dont get into a long term loan because if you plan on sticking to the very end you'll end up paying a lot in interest payments .
    That's the mentality of most people who have very little clue on contracts or have no idea on accelerate a contract. Which is why the uneducated car buyer end up in digging them selves in a huge financial whole when they try to trade in their vehicle in a short period of time. It's really painful stupidity that leads to a repo soon after. Prices of vehicles have jumped over past few years and have become expensive .
    My best advice is learn how to circumvent the vicious cycle people put them selves in with car purchase. How you ask? It's the opposite of this bloggers advice to uneducated. Go with the 72 months payment because it's easier to manage but dont go higher. The worst thing you do here is take it to the end of full term. You make your normal contract payment each month. Then right after you do, if you have an extra $25,50 a $100 make a payment toward the principal balance. Now the mistake that the uneducated make is they lump the extra money together with their regular monthly payment. Huge mistake !
    By doing so your helping the banks payoff your interest. That's how the banks make their money. To truly accelerate your loan you need to call the bank and let them know the extra payment is strictly for the principal balance only. By knocking down the balance you can pay off the loan not 6 years but maybe 4 or 3 years if your aggressively paying more towards the principal balance. Its a simple interest loan and there are no pre payment penalties. If you get to pay off your car in 3 short years your at least break even or may have some equity value in your car.
    In the long run your avoiding paying more interest if you were to stick to the loan towards the end.
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