When financing your car, it can be tempting to take just about any deal the auto dealer offers to receive a low monthly payment and drive away in your vehicle of choice. However this practice should be avoided, especially if it results in you driving off the lot with a long auto loan to worry about for the next several years.
Here are a few reasons why:
The interest will skyrocket the price of the car. Let’s look at a quick scenario. Say you find a vehicle that you love that costs $10,000 and you qualify for a 7% interest rate. If you have a 48-month loan, your monthly payment will be $239 and your interest over the life of the loan will add up to $1,494. However, if you take a 72-month loan, your interest rate will be much higher – let’s say 9% – and while your monthly payment will be lower ($180), your total interest will more than double ($2,978).
You’ll owe more than your car is worth. Owing more than the car is worth actually occurs with many vehicle owners because its value depreciates so quickly – 20-30% in the first year alone. However, after a couple of years of payments, you normally can reduce the amount you owe until its value is more than what you’re paying. But with interest being so high on a long auto loan, it’ll be difficult to reduce the principal amount you owe, so if you try to trade it in after 2 years, you may still owe close to the amount you did after financing your car. Avoid being upside down on your auto loan at all costs.
You may still be paying it off after you’ve traded it in. If you have a 72-month loan and decide at month 50 that you want something new, unless you’ve paid it off, you will have to move the difference between the amount you owe and the vehicle’s worth into the next loan. Since your long auto loan makes it difficult to pay the principal balance down quickly, you may actually owe something when financing your car. Make sure you completely understand the differences between long and short auto loan repayment periods.
Choosing a long auto loan when financing your car can make the difference in how much you’ll spend over the life of your loan. So before you sign on the dotted line, it’s good to consider all of your other alternatives. It’s also advisable to secure your financing before purchasing a car so that you are comfortable with the terms and payments.