Auto financing isn't getting any cheaper. With average payments of more than $500 a month, even for used cars, it's no wonder most borrowers stay on the loan for more than 60 months.
As car prices continue to rise along with other costs, many buyers are finding it increasingly difficult to pay off a 60-month car loan at once. Since 2020, the number of borrowers who have received loans for 60 months has decreased by almost 6%, while the number of borrowers who have received loans for more than 73 months has increased by almost 11% in the same period.
Even though you can finance a car for nearly ten years, that doesn't always mean you should. Here's what auto loan terms mean for you and your credit term.
How to finance a car?
If you don't have enough money to buy a car, which most people don't, you can get a car loan. If you go this route, the lender pays the seller for the value of the car and you pay the lender each month until the loan is paid off.
When you apply for a car loan, loan eligibility depends on factors such as your credit score, your debt-to-income ratio (DTI) and the amount you're borrowing. Once approved, your monthly payment will never change; A portion of each payment goes toward interest, and the rest goes toward principal (the original amount you borrowed). The loan amount you receive may be less than the value of the car you are financing.
How long can you finance a car for?
You can finance your car from a few months to 84 months or more than seven years. The most common term is 72 months or six years, followed by 84 months.
The longer the term, the lower the monthly payments, but the higher the overall interest rate. On the other hand, shorter terms mean higher monthly payments, but you pay off the car faster and pay less interest.
In most cases, you can finance the car for as long as you need, as long as your lender and the seller agree on the terms. Say more if you have excellent credit and a proven history of on-time payments and reliable income. If you have bad credit and low income, you may not carry as much weight in car buying negotiations.
Advantages and disadvantages of long term car loans
Be sure to weigh all the pros and cons of a long-term car loan before applying.
Advantages of long term car loan
- Low monthly payments: For borrowers who don't have a large monthly car payment budget, longer terms may be the cheapest option.
- Reduced risk of default: The cheaper your car payment, the less likely you are to miss a payment. If you fall behind on a payment, your car can be repossessed and your credit score can be severely damaged, reducing your chances of getting a loan in the future. Paying on time plays an important role in a high credit score.
Disadvantages of long term car loan
- Higher interest rates: Longer term auto loans usually have higher interest rates. You'll also pay more interest over the life of the loan because you owe more.
- Lower costs: Because longer loan terms cost more, by the time you pay off the car, you may have paid more than it was worth. You also need more time to build equity in your car, so if you want to resell the car before paying off the debt, you could end up losing money.
What do you need to finance a car?
When preparing to finance a car, keep the following details in mind:
- income Lenders want to see that you can afford the monthly loan payment. You may need to provide proof of income from your main job, side business and any assistance you receive from the government.
- Deposit When you sell your car, you can use it as a down payment on a new car. Otherwise, you may need to set aside a savings fund first. The higher the down payment, the less you have to borrow. In some cases, you don't need to buy a car, but it can increase your chances of getting a permit.
- Strong credit rating. The higher the credit rating, the lower the interest rate. Paying off your debt and keeping your DTI ratio low can improve your chances of getting higher rates. If you don't have good credit, consider applying with good or excellent credit.
- Rate your purchases. You don't have to rate the store, but it's a good idea. Compare multiple auto lenders to get the best rate for your situation. If you have the time and resources, you can get pre-approved by your bank or credit union instead of getting financing through a dealership.
Short-term or long-term car loan: which is better?
The best loan terms are those that suit your specific needs. When considering your options, use our car loan calculator to estimate what you can afford.
For example, suppose you borrowed $25,000 to buy a car at an interest rate of 4.99%. This is how much you will pay in interest depending on the terms of the loan.
If you can pay off the loan faster with a larger monthly payment, you should choose the shortest terms possible. But if you risk paying late, more responsible terms.