Buying a new car is a big commitment. Taking out a car loan affects your personal credit, as well as monthly budgets. You need to be research and think it through thoroughly. Is the vehicle going to be a long term purchase? How much interest can you afford? Will you eventually trad the car in? When you answer these questions you will have a better idea of the length of the car loan needed. What else do you need to consider?
Car Loan Approval
If you apply for 3, 4, or 5 year length loans, your approval rate is generally better. Lenders are less likely to approve 7 year loans as these are a big commitment to take on for both parties. Your lender will generally make the final decision about the length of your loan based on what they are willing to approve. This is mainly based on your credit rating. Before you meet a lender, review your credit report and be aware your approval rate and your credit score. Not sure your it’s good enough? Check out what you can do here.
Monthly Payment Options
By opting for a longer term car loan, it can (in the short term) cut your costs. Monthly payments drop lower the longer the length of the loan. Though, in the long-term, it does add up to more. If you’re interested in keeping the same car for a few years, a longer term loan might be the way to go. It allows consumers to drive the car they want, at a monthly price they can afford. If you’re going to trade in the car sooner, it makes more sense to go with a short term loan and pay if off asap.
Effect on Your Interest Rate
Interest rates on a car loan get higher the longer you take the loan out for. Therefore, if you opt to increase the length of your loan to make it more affordable, you will actually be paying higher interest rates. This unfortunately means more money in the long term. If your overall cost is more concerning than monthly payments, you are better off opting for a shorter length of time.
If you are considering reselling or trading in your vehicle at the end of the loan, the time-length you choose is very important. The longer your loan is, the older the car is getting, the higher the mileage, and the bigger the risk of wear and tear by the time it is paid off. If you decide to trade in the car before the car loan is fully paid off, your equity may be negligible. Again, you must consider how long you can anticipate wanting this particular car and model before deciding on the length of the car loan you take out.
If you are buying a car, you should determine your circumstances in terms of a car loan. The length of your loan is going to affect your finances for quite some time so you need to be prepared. Do some research on whether buying or leasing is better for you.
Featured Image: Thinkstock/ HailshadowPosted on June 17, 2016