How to Choose the Right Term Length for a Car Loan

There are many factors to take into consideration when you are applying to get a new car loan. One of the most important factors to think about, although many people don’t pay it a lot of attention, is the term length of the car loan. In other words, for how many years into the future will you be making payments on this loan? Selecting the right term length for your car loan at the start of the loan can save you a lot of hassle down the road.

Car Loan Term Length Options

The amount of time for which a car loan term will last is usually calculated in months that correspond to the length of one year. In other words, the loan is generally a 12-month (one-year) loan, a 24-month loan, a 36-month loan, etc. Although there are some exceptions, most car loans don’t last any longer than 72 months (or 6 years). This makes a lot of sense since many people are already starting to look at getting another new car after they’ve had one for around 6 years.

The majority of car loan borrowers choose a term length that is in the middle of the available options. Loan.com says that 3, 4 and 5 year loans (36-month, 48-month and 60-month) are all very common. It is less common for people to get shorter loans although if you are able to offer a large down payment on the car then you may require only a one or two year loan. The only time that you are likely to see 6 year loans and longer is for very, very expensive cars.

Reasons to Select the Shortest Possible Loan Term Length

Anyone with experience or knowledge about financial issues will tell you that you should try to get the lowest term length possible for your car loan. There are many reasons for this. Those reasons include:

o   You will pay less in interest over time. The longer that you are paying monthly payments on a car, the more that you are paying in interest over the long haul. That’s just money wasted that you don’t need to be spending if you can afford to accept a shorter loan term.

o   As the car ages, you may owe more on the loan than the car is actually worth. Cars depreciate quickly in value especially if the car that you are buying is a brand new car. The older the car gets, the less it is worth. If you are still paying on a car in five years and you get into a car accident then the insurance company may total out the car for a value lower than what you still owe on the loan. In other words, you’ll have no car and still owe some loan money!

o   You’ll be able to worry about other financial obligations sooner. Whatever amount of money you are paying back on a car loan will become available to you as additional funds once the car loan is paid off. You can then use that amount to buy other big items or pay off other debts. For example, if you get a 36-month loan that requires $300 per month in payments then at the end of three years you’ll suddenly find yourself with an extra $300 per month to spend on other things. A longer term, such as five years, would require waiting longer to be able to have that money for other things.

o   Peace of mind. The quicker you pay off the car loan, the less time you have to spend worrying about making those payments.

o   You can reduce insurance coverage sooner. Many car loans require that the car owner have full insurance coverage throughout the duration of the loan. At the end of the loan, many people switch to other car insurance options that are less expensive. You can save yourself on insurance costs by getting a shorter term length for the loan and reducing your insurance coverage sooner.

BankRate recommends always trying to get a loan that is 48-months or shorter because of these issues.

Benefits of a Longer Term Length for Car Loans

The smartest financial move is almost always to get the shortest-term length that you can afford to make the monthly payments for.  However, there may be benefits to getting a longer term length loan. Those benefits include:

o   Lower monthly payments. The main reason that people get a longer term length is to have lower monthly payments. If you truly cannot afford a car any other way and you really need one then getting the longer term length may make the most sense.

o   You can get a fancier car. Maybe you can afford to make the payments for a 3-year loan on a small car but you really want to get a nice car and can only do so if you extend to the 5-year loan. Think carefully about whether or not you really need the nice car. If you feel that you must have the nicer car then a longer term length can help you get it.

o   Special low-interest options may be available. For example, you may only be able to get a traditional interest rate on a 3-year loan but may qualify for a special low interest rate on a 5-year loan. In most cases, interest will be lower for shorter term lengths but if you can get one of these special low-interest long-term loans then it can be a smart way to go.

Weigh your options carefully before choosing the length of term you’re willing to accept for a car loan payment. Try to picture what your life and income situation will be like in 3 or 4 or 5 years and see how a car loan payment fits into that.