Most people need an auto loan to finance the purchase when buying a car. But one important decision you will have to make is the length of your auto loan term. The length of your auto loan can significantly impact your monthly payments, overall interest payments, and the total cost of your car. Here are some important factors to consider when choosing an auto loan term length:
The length of your auto loan will affect your monthly payment because most auto loans start with a small down payment. For example, if you buy a $20,000 car with a $2,000 down payment, you will have to finance $18,000 for an average three-year loan. A longer-term auto loan will lower your monthly payments because it will spread out the amount you need to repay over time. For example, the monthly payment for a $20,000 car with a $2,000 down payment will be about $705 monthly. If you take out a six-year auto loan, your monthly payments would be about $555 per month.
Overall Interest Costs
The length of your auto loan also affects your overall interest costs because it affects how long you have to repay your loan. The total interest costs are determined by the total amount you borrow and the length of time that it takes to repay that amount. For example, if you buy a $20,000 car with a $2,000 down payment and take out a three-year auto loan at 5.5% interest, you will have to pay back $23,857 after three years because your monthly payments will be almost $715 per month.
Your monthly budget is important when choosing an auto loan term length. Choose a term length that works within your monthly budget. You should also be able to afford the additional payments that you need to make after your auto loan is paid off.
If you choose a term length that is too long, buying a car will be too expensive and make it easier to save money in other areas of your life. On the other hand, choosing a term length that is too short will increase your overall interest costs and prevent you from buying an automobile for many years. The best way to decide on an auto loan term length is to consider your monthly budget and long-term goals.
Car Loan Refinancing
Refinancing is a lot like buying a car. You need an auto loan, information goods, and financing options, and you may have a trade-in vehicle. For example, you can use refinancing to get specific terms that are more favorable than current financing or lower interest rates, which could reduce the amount of interest you pay over the life of the loan.
Your credit rating
The higher your credit rating, the lower your risk of defaulting on your loan. Lenders are less likely to view a car loan as risky if you have a solid history of paying back debts. Condition refers to whether your car is in good or poor condition. The better the condition, the more likely you will be able to get a lower interest rate. To keep your credit rating in good shape, avoid buying used vehicles because they will have a higher lien or more owners than new cars. Also, avoid financing through private lenders as this always involves a large interest rate for the state of California.
Your cash flow and short-term goals
Before choosing the best auto loan term length for you, it is important to consider your cash flow and short-term goals. You should consider how much money you will receive from a certain source over a certain period.
The loan amount you need can also affect the term length you choose. A larger loan may require a longer term to fit within your budget. The larger the loan, the longer it will take to pay it off. So think about how much money you need before you choose an auto loan term length.
Prepayment Penalty and Monthly Payment Increase
A prepayment penalty is charged when your car or other loan is paid off early. The pre-payment penalty may be as much as 1% of the unpaid balance.
If you choose a term longer than the original loan amount, you can no longer pay off the loan quickly after making your payments. This may result in a monthly payment increase or a higher interest rate. Your monthly payment may also change if you choose an auto loan term length shorter than the original loan amount. This type of change in monthly payment is called Pay-As-You-Go or PAYG.
The size of your down payment can also impact your loan term length. A larger down payment can allow you to choose a shorter term length. The reason is that the loan-to-value partially determines the interest rate on a loan. The higher payment in loans with low loan rates is paid down faster. Therefore, if you want to lower your monthly payments, you need to make larger down payments on your car loan.
Disposition Value of the Vehicle
The disposition value of your vehicle is an important factor to consider when choosing an auto loan term length. If you choose a term length that is too long, your car will depreciate before you pay it off. The disposition value is the estimated value of your car. This value will be determined by a professional mechanic who specializes in depreciation calculations. The higher the disposition value, the more quickly your car will depreciate.
Your loan type can also affect the auto loan term length you choose. There are two types of loans: open-ended and closed. An open-ended loan is a loan that can be paid back over time and through additional payments. Adding a note to your auto loan terms could also increase the interest rate. An open-end loan can be repaid by making monthly payments, additional payments or through a combination of both. A closed-ended loan does not have an option for a cash-out payment at the end of the term.
In conclusion, the amount of money you have, the amount of money you need and your financial situation will determine the term length of your loan. You will be able to see this information on several websites that offer automotive financing. In addition to choosing an auto loan term length, you also need to consider the interest rates, fees and whether or not your car loan has a prepayment penalty.