How Long Should You Finance a Car?

Car shoppers are always looking for the best way to get a great deal. But with car prices representing a significant financial investment, the fact of the matter is that most people don't have the money to pay upfront for their new or used vehicle. Auto loans are a means of borrowing money to cover the expense of a vehicle. But not all auto loans are the same, so choosing the right car loan to suit your needs is something you should do carefully.

Use this guide before deciding on your next car loan to ensure you're getting a deal that works for you and your unique financial situation. We'll help you find a loan through a bank or credit union we work with that will give you a competitive interest rate and a favorable loan term that fits your lifestyle, avoiding bad situations like having a steep car payment or negative equity.

What Is the Average Car Loan Length?

The average loan length when financing a vehicle is 72 months for both new cars and used cars. A 72-month loan provides a good balance between reasonable amounts for your monthly payment and a good car loan term that will minimize the interest you pay for a new or used car.

Using this average loan term as a guideline can give you a good benchmark to compare other loan terms. However, you shouldn't feel like you're constrained by what the average driver is typically doing when taking out a normal car loan. You need loan terms that suit your unique situation, so don't be afraid to go for a shorter or longer-term loan than the average amount if it benefits you.

What Are the Benefits of Long-Term Car Loans?

Long-term loans can be good for anybody who is having difficulty making payments on their vehicle. A seven-year loan or even longer loan gives you the flexibility you need, reducing the amount you pay each month by spreading those payments out across an extended period.

Long-term auto loans can put vehicles that would otherwise seem inaccessible more easily within your reach. By spreading out the cost of the vehicle over lengthy loan terms, a long-term auto loan helps to give you more options for what you can drive home in.

What Are the Benefits of a Short-Term Loan?

Taking out a car loan with a shorter loan term is great for anyone who wants to have their car paid off so they can enjoy being debt free sooner. The tradeoff compared to a long-term loan is that you'll see a steeper monthly payment when asking for short-term loans.

If you're able to afford the higher monthly payments associated with a short loan term, a car loan of this type can be great for your financial well-being. You'll pay less on the whole than you would with the average car loan length, giving you better value for your hard-earned money thanks to the shorter loan term. You can maximize this benefit by taking out a loan with a competitive interest rate.

Factors to Consider When Taking an Auto Loan

Trade-In Options

The car you're driving now can go a long way towards securing you the new car of your dreams. Getting a good deal on a trade-in will let you get the best possible deal when shopping for your next ride.

Look for car dealers who offer incentives for trade-ins. These special offers can help you get more money towards the vehicle you're looking to purchase next.

Used Vehicles vs New Vehicles

The amount that a car is worth has a big impact on the financing options that are available to you. While a new vehicle gives you access to the most cutting-edge features on the market, that benefit comes at a cost. You'll pay more to finance a car that is new compared to a used car, and the value of your new car will also depreciate much more quickly than a used car would.

The fast depreciation of a new car can lead to an unfavorable financial situation known as negative equity. Negative equity is when you owe more on your auto loan than the car is worth. Protecting your vehicle's value and choosing a car loan carefully can help you avoid ending up with negative equity and being underwater with your vehicle's value.

Down Payment

While an auto loan helps to cover the majority of your vehicle's value, a down payment is also made in most financing arrangements. This down payment covers point-of-sale expenses such as the sales tax and other fees as well as a portion of the total worth of the car. The remainder left over after this down payment is the loan balance you will pay over time according to your loan terms.

Making a large down payment will incur a steeper initial cost, but will help you save money later on down the line. Like with other factors involved in choosing a car loan, it's all about finding a balance that works for you. Consider making a large down payment if you have plenty of cash on hand, as this can help you avoid paying more in interest in the future.

Loan Terms

Deciding on the length of your loan term is a vital decision when taking out a loan for your car. While the standard 72 month loan is commonplace in the world of car loans, there are other options available that allow you to personalize your loan so that it suits your individual lifestyle.

You can lower monthly payments by taking out a longer term for your loan, but this lower monthly payment will result in you paying more interest over time. Conversely, short loan terms will lead to steeper monthly payments, but the loan will be paid back more quickly, and you'll pay less interest compared to what you would pay on a long-term loan.

Monthly Payments

When determining whether or not you can fit an auto loan into your monthly budget or not, the amount of the monthly payment the loan will require is often the decisive factor. Monthly payments are the agreed-upon amount that you repay your car loans over time.

The amount of your monthly payment is influenced by a number of factors, including the value of the vehicle and the loan length. Your monthly payments for a long-term car loan on a used car are going to be less than the payments made on a short-term car loan for a newer, more expensive car.

Interest Rate

Along with the agreed-upon amount you and the lender decide the car is worth when taking out a loan, you'll also pay interest on the loan. The interest paid is the profit that the lender takes in exchange for providing you with the loan you need to pay for your vehicle. Paying less interest is ideal as this will help you save money throughout the life of the loan.

National interest rates vary depending on a wide variety of economic factors. Staying informed on these factors through reputable sources of economic news like the Associated Press is helpful for anyone in the market for their next vehicle. By timing your purchase when interest rates are low, you can get a better deal for your vehicle.

Credit Score

Your credit score has a big impact on the financing terms that will be available to you when you finance a car. Having good or excellent credit will help you get better interest rates to reduce the amount you pay over time.

Building your credit score prior to applying for an auto loan can benefit you later on down the line. Making regular utility payments or credit card interest payments are some methods you can try for strengthening your credit score. New car buyers who are in the market for the first time especially can benefit from taking some time to build a credit portfolio, so they have access to better loan rates and options.

Stop by our finance center to get all the short and long-term car loan options you need to make the right decision for your financial future. We'll get you a deal with a competitive interest rate, so you don't pay more than you need to. Visit us at Landmark Dodge Chrysler Jeep Ram today or give us a call at 816-836-0100!

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