Auto loans are tricky. A single error can ruin your financial stability and earn you high interest rates in the future. So, it is important that you understand every aspect of the loan process and make a wise decision.
When it comes to analyzing the multiple aspects of an auto loan, loan term takes a backseat. If you are in the loan market and confused over choosing the perfect auto loan program, do not commit the mistake of ignoring the loan term.
What are the Different Auto Loan Terms offered by Lenders?
A couple of years ago, the recommended term offered by lenders was 5 years or 60 months. However, the time has changed. Today, you can easily obtain 8 years or 96 months loan. Also, there have been instances where you can keep making payments on an auto loan for 9 years or 108 months.
Is a Longer Auto Loan Term considered as a Boon for Bad Credit Car Buyers?
If you are a bad credit car buyer, you will obtain higher interest rates than a good credit car buyer. Lenders understand that higher interest rates will make monthly payments difficult for you. So, they provide longer loan terms to make monthly payments bearable. Does it mean a longer loan term is a boon? It’s time to understand the financial effect of it.
The Interest Amount
If you have bad credit history, lenders will provide you with high interest rates. And, higher interest rates over a long period of time means higher amount of interest.
The Upside Down Situation
If you obtain a short-term auto loan, you will be in an upside down situation for the first couple of years. But, if you opt for a longer loan term, you will owe more than the car’s worth for several years. It is because you will make smaller payments every month.
The Selling/Trade-In Problem
If you are in an upside down situation, your car has no equity. It is difficult to sell such a car and buy a new one. Also, it is a challenging task to trade-in the car for another vehicle.
The High Maintenance Cost
If you opt for it, you will face difficulty in selling the car. And, if you keep using the car for several years, you will have to take care of increased maintenance cost such as higher repair cost and greater fuel expenses.
When is a Longer Auto Loan Term recommended to Bad Credit Car Buyers?
It makes financial sense in the following situations:
1. If you have received very low interest rates on the loan
2. If you can opt for substantial down payment and reduce the chances of an upside down situation
3. If you use your car for a very long time
There is nothing wrong in opting for a longer auto loan term. But, it is important to ascertain your situation before making a decision. Remember to look before you leap.