Q&A: Is a Short or Long-Term Auto Loan Repayment Period Better — and Why?

long term loansQ: I recently saw a deal for an 84-month auto loan that would allow me to lower my monthly payments by a lot, but seven years seems like a long time to be paying off a car. Would it be better to go with a shorter-term auto loan and pay more each month, or is it smarter to stretch it out?

A: Car loans have been growing longer and longer — according to new data from Experian, the average term length on car loans grew to a record-high 65 months in the fourth quarter of 2012 for new auto financing. The previous quarter (Q4 of 2011) was 63 months. Even so, plenty of car buyers are financing their vehicles for much longer than that; Q2 2012 Experian data found the biggest growth was in loans ranging 73 to 84 months, accounting for almost 16 percent of all new car loans.

Auto loan interest rates are incredibly low these days, while cars are only getting more expensive. That means borrowers are willing to finance pricier cars while still keeping those monthly payments low by extending the durations of their loans. The problem? While monthly payments are lower with long-term loans, the total cost of the vehicle is significantly higher than if they had financed over a shorter period of time due to interest payments.

It’s tempting to focus only on monthly payments, but allowing your loan to go on too long will cause you to pay much more for your new car that it’s worth. Low payments on a nice ride appears to be a win-win, but the only real winner is the lender.

If you can’t afford the payments on an auto loan that lasts only a few years, that’s a good sign you’re trying to buy a car you can’t really afford, period.

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Photo: tourist_on_earth


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