Should you Avoid a Long Term Car Loan?
Car loans are tricky. A single error can ruin your financial stability and earn you high interest rates in future. So, it is important that you understand every aspect of the loan process and make a wise decision. When it comes to analyzing the multiple aspects of a car loan, loan term takes a backseat. If you are in the loan market and confused over choosing the perfect car loan option, do not commit the mistake of ignoring the loan term.
A couple of years ago, the recommended term offered by lenders was 5 years or 60 months. However, the time has changed. Today, you can easily obtain 8 years or 96 months loan. Also, there have been instances where you can keep making payments on a car loan for 9 years or 108 months.
If you are a bad credit car buyer, you will obtain higher interest rates than a good credit car buyer. Lenders understand that higher interest rates will make monthly payments difficult for you. So, they provide long term car loan to make monthly payments bearable. Does it mean a longer loan term is a boon? It is time to understand the financial effect of it.
Effect 1: The Interest Amount
If you have bad credit history, lenders will provide you with high interest rates. And, higher interest rates over a long period of time means higher amount of interest.
Effect 2: The Upside Down Situation
If you obtain a short term car loan, you will be in an upside down situation for the first couple of years. But, if you opt for a longer loan term, you will owe more than the car's worth for several years. It is because you will make smaller payments every month.
Effect 3: The Selling/Trade-In Problem
If you are in an upside down situation, your car has no equity. It is difficult to sell such a car and buy a new one. Also, it is a challenging task to trade-in the car for another vehicle.
Effect 4: The High Maintenance Cost
If you opt for it, you will face difficulty in selling the car. And, if you keep using the car for several years, you will have to take care of increased maintenance cost such as higher repair cost and greater fuel expenses.
However, long term car loan is recommended in the following situations:
- If you have received very low interest rates on the loan.
- If you can opt for substantial down payment and reduce the chances of an upside down situation.
- If you use your car for a very long time.
There is nothing wrong in opting for a long term car loan. But, it is important to ascertain your situation before making a decision.
:- Posted by Admin on 17th July, 2022