|IS A LONGER LOAN TERM BETTER?|
|Posted on: Jul. 09, 2017 in Car Loans|
There are multiple financial factors that come into play when financing a car. The total price of the car must be considered, but you’ll also have to factor in how much of a down payment you can afford, how much you can comfortably pay each month, and what interest rate you can get. One other thing to keep in mind is the length of your auto loan.
How long you can take to pay off the loan is determined by the lender, but you may also have a say in it. The longer the term of the loan, the lower your monthly payment will be. Consider this very simple example: If you borrow $1,200 and decide to repay it over 12 months, that’s $100 per month. However, if you decide to pay that over 24 months, you’ll only need to pay $50 per month.
It may seem like a no-brainer to simply extend the length of your loan until you reach a monthly payment that fits your budget neatly. Unfortunately, nothing is ever that simple! The one thing the example above didn’t consider is interest. Interest is the amount you’ll pay to borrow the money in the first place. Interest is calculated by taking a percentage of your principal (the amount you borrowed) and adding it on to that principal amount. This calculation doesn’t just happen once – it happens on a monthly basis, if not more often, for the life of the loan.
The longer your loan term, the longer interest will continue to grow on the principal. At the same time, you’ll be paying that principal down more slowly. When you borrow money with interest, you always have to pay back more than the original amount. The longer you take to pay, the more you’ll end up paying in the end.
To avoid this, first make sure your car can fit into your budget. Your monthly payments should be no more than 10% to 15% of your gross monthly income. If you have to stretch those payments out for too long to hit that number, consider a less expensive car.
If you’re ready for a new car but your credit is keeping you from getting approved, CreditYes can help with our bad credit auto loan program! We can match you with a dealership in your area that will be with you every step of the way. Our service is fast and free. Fill out our secure online application and get behind the wheel of your next car today!