How to choose the Ideal Loan Term for your Used Car Loan?

By: Kaitlin Miller


According to data released by Experian, 10.1 percent of all current used car loans are longer than six years - this shows a rise of 11.5 percent over 2012. It is the age of longer loan terms and many car buyers are opting for it because the cars have become costlier and car budgets have become smaller.

A couple of years back, 60-month loan term was the trend. Today, lenders are offering 72-month loan terms. Few car buyers have even received 98-month loan terms for buying cars. If you are in the car market and shopping for a used car, lenders will offer you longer loan terms and lower monthly payments. You may consider it a good alternative because of your over-stretched budget. You already have several payments to make by utilizing the low-household income. And, longer loan term may seem to be the only affordable alternative.

But, you cannot be more wrong. Here are reasons to help you understand the reality of longer term loans.

1. You spend More Money in Interest

When you opt for a used car loan with longer loan term, you end up paying more money in interest than you will pay when you select a shorter term. Letís take an example for it.

Scenario - 1
Car Loan - $10,000
Interest Rate - 4%
Loan Term - 4 years
Monthly payment- $225.79
Total Interest - $837.95

Scenario - 2
Car Loan - $10,000
Interest Rate - 4%
Loan Term - 7 years
Monthly payment- $136.69
Total Interest - $1 481.80

So, if you want to save a considerable amount of interest, you must opt for shorter loan terms. Donít get fooled by lower monthly payment. It is just lenderís way of attracting you and earning more bucks.

2. Shorter Life of Used Cars + Longer Loan Term = Higher Problems

There is one more reason for choosing a shorter loan term while buying a used car. Pre-owned automobiles have a shorter life in comparison to new cars. So, if you opt for a longer loan term, you will end up with an upside down car loan. You will owe more money on the car than its worth. This situation can create a problem when you try to sell or trade the automobile. It will also be a problem in a situation when the car is destroyed in an accident.

Now, when you opt for shorter loan term, you have to manage slightly higher monthly payments. To tackle higher monthly payments, you have to reduce the loan amount. Hereís how you can do it:
a) Make a smaller down payment by utilizing your savings or
b) Trade-in your old car or
c) You can choose a car with a lower value.

It is quite understandable that making higher payments can be an inconvenience but remember that a short-term inconvenience is better and affordable than a long-term loss.

So, remember to choose shorter loan terms while shopping for a used car loan.

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