You've found your dream ride and woo-hoo, the lender offers affordable auto loan terms. When your excitement winds down, you realize you're saddled with car payments for the next six years. The question is, how much will your dream ride be worth and how much will you owe when you want to trade in your vehicle or refinance your car loan? Here are a few things to consider when deciding how long to pay for your new car.
Longer Auto Loan Terms: Pros and Cons
Benefits of a longer auto loan term include:
- Lower payments. Financing your car over a longer term provides lower payments and budgeting flexibility.
- Increased affordability. You may also qualify to borrow more with a longer loan term, but this requires careful consideration to avoid borrowing more than you can comfortably repay.
- Less risk of losing your car due to financial hardship. Lower payments can mean less stress if you experience financial hardship, such as losing your job or being out of work due to illness or accident.
Drawbacks of a longer auto loan term include:
- You'll be paying for your car long after the thrill of buying it is gone.
- Long-term auto loans, interest, and vehicle depreciation can leave you owing more on your car than it's worth. The Federal Trade Commission advises car buyers to beware of the consequences of negative equity on car loans. Owing more on your car than it's worth causes problems when it's time to trade in your car and buy a new one. If you owe more than the car is worth, you'll end up paying off your car loan and having no funds for a down payment.
- If your car is totaled in an accident and you have negative equity in your car, your insurance company may pay the entire amount of claim benefits to your auto loan lender to pay off your car loan. You're left high and dry with a wrecked car and no insurance claim funds for a down payment.
- The longer your loan term, the more interest you'll pay. Remember that great deal you made at the dealership? Maybe you negotiated a discount on a year-end model or took advantage of a purchase incentive. The longer your repayment term, the more you'll pay in interest. Paying additional finance charges reduces the benefit of upfront deals and discounts.
It's easy to get caught up in the excitement of buying a new car, especially if you've been driving an old car for a long time. Before getting carried away with that new car smell and signing for an auto loan term that allows you to buy more car than you can afford, consider all auto financing options and take a cue from a classic bumper sticker that reads "Don't laugh. It's paid for."
Shopping and comparing car loans before you shop for your next ride can help with avoiding costly mistakes with financing when you're buying a new car. Request and compare auto loan quotes and loan terms before looking at new cars. Going to dealerships with a pre-approved auto loan provides a good negotiating tool and also keeps you from buying a car that's beyond your budget.