How Long Should the Term of a Car Loan Last?
A car loan can vary in length anywhere from 1 year to 6 years on average. There is no magic number of months that is right for a car loan across all situations, but there are sometimes when you should opt for a shorter loan over a long loan.
Benefits of a Short Term Loan
The main reason people opt to make a car loan as short as possible is to save money. Shorter loans tend to come with lower interest rates. You will also be holding the loan for a shorter amount of time, meaning those interest rates are assessed for 24 months instead of 72, for example. The longer you hold a loan, the higher the cost of financing. Beside this point, it will also take you longer to build equity in the car and to own the car outright with a long loan. A short loan allows you to gain an actual asset much faster.
Benefits of a Long Term Loan
A long term loan is cheaper on a month-to-month basis. Even though you are assessed a higher interest rate, the payments are spread out over a longer period of time. You will find a long-term loan much more affordable in the day to day. Some people do not have the income to support a short-term loan, and they will be required to spread out payments simply to keep making the payments each month.
Used Car Loans Should Be Short
As a basic rule, new car loans should be shorter than new car loans. Cars depreciate in value the moment
they are driven off a lot. They continue to rapidly decrease in value as they are driven and as time passes. Cars also experience what is called an exponential rate of decrease in value. While they decrease only a small amount for the first 40,000 miles, the next 40,000 will represent a huge chunk of cash. If you were to take a long loan on a used car, you would be left with an asset worth very little by the time you paid off the loan. Further, there is the risk of recourse in the case of default. This means, if you default on your loan, the lender liquidates the asset for a value much lower than what you still owe. You may have to pay the difference.
New Car Loans Flexible
New car loans present a little more flexibility since the rate of decrease in value is slightly slower. However, you should be aware of changes in technology that quickly date your car. In the past, cars remained relatively stable in terms of design and technology. With the advent of "smart car" technologies like blue tooth, navigation systems, side and rear cameras and safety improvements, cars become outdated much faster. Along the same lines, changes in the way cars are powered may make a long car loan risky. As more consumers look to hybrid or electric vehicles in the future, gas powered cars should only be purchased with short car loans. This protects you from having a car worth very little once you actually own it.
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