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5 Reasons Savvy Car Buyers Choose Short-Term Car Loans

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Short-term car loans make good financial sense if you can afford them. You’re choosing to pay less in total interest in exchange for a higher monthly payment.

Saving money over the life of the loan is a smart thing to do, but only if you can afford the payment. You’ll have to decide how long you should finance a car and how the payments fit in with your overall financial picture.

5 reasons to choose a short-term car loan

The length of a short-term car loan varies, but the most common auto loan term is 72 months (six years). Some people might consider 36 months (three years) to be short-term, while others consider 60 months (five years) to be a short-term option. In any case, the shorter the term, the less you’ll pay for the vehicle loan.

Save on total interest

Opting for a short-term car loan reduces the total amount of interest you pay. For example, imagine you’re financing a car for $38,948 with an APR of 8.06%. Here’s a table comparing a range of common loan terms for a borrower with fair to good credit.

Loan termMonthly paymentTotal interest paidTotal cost to own
36 months$1,192.54$4,909$42,931
48 months$929.31$6,584$44,607
60 months$772.05$8,301$46,323
72 months$667.77$10,057$48,080

Choosing the 36-month loan over the 72-month term will keep more than $5,000 in your wallet over the life of the loan, but the monthly payment is $524.77 higher.

Use one of our auto loan calculators to try out different terms for your car loan.

Earn a lower interest rate

You may be able to get a lower rate on a short-term loan compared to a longer deal. Some especially low rates offered by automakers are only for shorter auto loan terms, like 36 months. Here’s more on 0% APR car deals.

Build equity faster

With short auto loan terms, you pay down the loan faster so you will be less likely to owe more than the car is worth. This is important because negative equity makes it harder to sell or trade in the car before the loan is paid off.

Save on insurance

Auto lenders typically require borrowers to buy full-coverage auto insurance, but once you own the car, you have choices on how much insurance to carry. After the loan is paid off, you could carry only the insurance required by your state. Opting for a short-term loan means you can make this money-saving switch sooner if you choose.

Use the savings for other things

When you save on your short-term car loan, you can use the money for vacations, investments or anything else you may need. You can then drive with the peace of mind that you spent as little as possible on the loan.

Downsides of short-term car loans

While the savings on interest from short-term car loans may seem attractive, you have to look at the realities of your overall monthly budget. You don’t want to put yourself in a position of financial stress or risk being unable to make your payments as promised.

Higher monthly payments

The difference in payments between a short-term and longer-term auto loan can be significant. That higher monthly obligation could put a lot of stress on the rest of your budget. It’s vital to ensure that you have the monthly cash flow to cover all of your expenses. Here’s a guide on how to budget to pay off debt.

Opportunity costs

If a large portion of your monthly income goes towards your car payment, you may be missing out on contributing to your retirement fund, or you may not be able to swing your dream vacation until the loan is paid off. That higher monthly payment may leave little wiggle room in your budget to take advantage of opportunities when they arise.

What to know about long-term car loans

In early 2022, the average auto loan was 69 months. Here are a few things you should consider before you commit to a longer-term car loan.

  • Higher interest rate: Interest rates are typically higher for longer-term loans, adding to the overall amount you will pay for the car.
  • Danger of being upside down: With a longer-term loan, you run the risk of owing more than the car is worth for at least part of the loan term. You can reduce that risk of being upside down by making a larger down payment or paying additional principal on your loan each month.
  • Lower monthly payments: The car salespeople aren’t wrong: A longer term will give you a lower monthly payment. But be aware of how much more that lower payment will cost you over the life of the loan.
  • Higher total cost to borrow: The total cost of borrowing will be higher due to higher interest rates over a longer term. As seen in the comparison table above, you would pay nearly $43,000 over 36 months, but you’d pay more than $48,000 over 60 months. Staying within your monthly budget is important, so many people opt to pay more over the longer term with a lower payment, even if it means a higher total cost in the end.

Refinancing to a shorter auto loan

You can shorten the term of a car loan you already have by refinancing your auto loan. For example, if you have five years left on your auto loan, you could refinance to a three-year term. Keep in mind that lenders may have mileage and/or age restrictions on the cars they will finance. You can refinance an auto loan even if you’re upside down on the car.

Like financing a car for the first time, refinancing to a shorter term may also mean a higher monthly payment, unless you are able to obtain a lower interest rate. Consider refinancing if any of these situations apply to you:

  Your income changes

  Your credit score improves

  Interest rates drop

  You want a different loan term

Here’s more information on when to refinance and when to wait.

How to choose the best car loan for you

The best car loan for you depends on several factors, including your financial situation. Do some research before you sit down in the dealer’s financing office.

Determine your budget

Look at your monthly obligations and determine how much you can allocate toward a car payment. This will help you determine whether a short-term auto loan is possible for you.

Check your credit score

Your credit score helps determine the interest rates and terms you will be offered. Check your score to see if you would qualify for lower rates that might make a short-term loan a possibility for you

Get preapproved

An auto loan preapproval is a lender’s official offer to let you borrow up to a maximum amount for a set term and APR. Don’t forget to add taxes and registration and licensing fees to the amount you’ll need to buy a car. Then compare your preapproval with the dealer’s financing offers. You can fill out a form with LendingTree to receive up to five auto loan offers.

Compare offers

Look at the rates and terms included in the offers you receive. Make sure you understand the impact of the monthly payment and the loan term on your total cost to borrow.

Alternatives to a short-term auto loan

Make a larger down payment

Putting more money down at the time of purchase lowers the amount you have to finance. You can reduce monthly payments to a manageable amount by opting for a short-term auto loan with a larger down payment.

Pay more each month

You can pay ahead on the principal each month to reduce the amount of interest. You could take out a loan for 60 months but make the payments as if it’s a 36-month loan and save yourself a lot of money. By doing this, you still retain flexibility — if for some reason you can’t make the extra payment in a month, you won’t risk delinquency.

Short-term car loans: FAQ

The most common auto loan term is 72 months, or six years. The average loan term for the first three months of 2022 was 69.7 months for new cars and 67.4 months for used.

Long-term loans can help people get the car they want at a payment they can afford. For the first three months of 2022, over 73% of vehicle loans were for more than 60 months; 2.72% were for 85 months and up. The longer the car loan, the more you’ll pay in loan interest.

A car loan can be as short as 12 months, but terms depend on the lender. Many lenders offer terms of 24 months and up.

 

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