When It Comes to Car Loans, Shorter Is Often Better
A longer-term loan can make even the most expensive car look affordable. But is it really more cost-effective? You may find that often shorter car loans are better.
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.
Auto Loans Getting Longer
In the fourth quarter of 2019, the average auto loan term was over 69 months for new cars and nearly 65 months for used vehicles, according to the Experian State of the Automotive Finance Market report. Additionally, almost 32% of auto loans funded in Q4 of 2019 carried a term of six years or more, compared to just 26% in 2009.
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:
Higher Interest on Longer Loans
- The longer the term of the loan, the worse your interest is likely to be. Shorter-term loans generally qualify shoppers for a better rate;
- There’s a greater chance you’ll end up underwater. Without a substantial down payment, if you total the car* or need to sell it, you could end up receiving less than you owe on the loan; and
You Might Be Upside Down
- You’re stuck with the car even if you don’t want it anymore. If you want to buy a different vehicle, you likely won’t be able to trade in your car because of the difference between what you owe and what the dealer is willing to pay for it.
If you need a longer car loan just so you can afford to buy the car, that’s probably a good sign that you can’t afford the car in the first place. Strive to keep the length of your car loan shorter to save money, and visit Mid Oregon Credit Union for preapproval on a loan before you even begin shopping.
Preapproved Loans Put You in Control
That way you know exactly how much you can afford, and you can avoid taking out a loan that’s going to be a financial burden long after the new car smell has evaporated.
If you have an auto loan from another financial institution, Mid Oregon can help you refinance to a shorter term and still help you stay with an affordable payment.
* Mid Oregon offers Guaranteed Asset Protection (GAP) Plus, which eliminates “out of pocket” expense for a deficit between loan balance and actual insurance settlement amount should your vehicle be totaled or stolen. Talk to a Mid Oregon Loan Officer for details, or call (541) 382-1795.