Why It's Better to Get a Shorter Term Car Loan
Not everyone can afford to pay cash for a new car, so getting a car loan makes sense for most people - just make sure to limit the loan to as short a term as possible.You should aim for a car loan with a term of 48 months (4 years) or less. The shorter the time-frame, the more money you will save on interest costs.
If you can afford the higher monthly payments on a 2 year loan, that's your best option - but realistically, most car buyers will need to get at least a 36 month loan.
A 5 year car loan should be the maximum time frame you consider. If you can only afford payments by extending the loan to 6 years or more, you should be looking for a less expensive vehicle or be willing to wait 3 to 9 months while saving money for a larger down payment.
On a typical $20,000 car loan financed at 7% interest, you will save over $3,000 in interest if you opt for a 2 year loan versus a 6 year loan. The following table shows the amounts you save when comparing different loan terms:
| 2 yr | 3 yr; | 4 yr | 5 yr | 6 yr | |
|---|---|---|---|---|---|
| 2 yr | $0 | + $734 | + $1,503 | + $2,271 | + $3,063 |
| 3 yr | -$734 | $0 | + $769 | + $1,537 | + $2,329 |
| 4 yr | - $1,503 | - $769 | $0 | +768 | +$1,560 |
| 5 yr | - $2,271 | - $1,537 | -$768 | $0 | + $792 |
| 6 yr | - $3,063 | - $2,329 | - $1,560 | - $792 | $0 |
Many car dealers will try to pressure you into extended-term loans, especially if they feel you can't afford the monthly payments on a shorter loan.
Just remember that you'll be paying a lot more over the long-run when you stretch out your car loan. To top it all off, the longer you extend the car loan, the longer you will be upside-down on your car - meaning you will owe more than what the car is worth.
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid
About The Author
Gregg Fidan is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate
the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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