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    The Pros and Cons of Long-Term Car Loans

    A car loan repayment tenure that extends beyond 5 years (60 months) falls under the category of long-term car loans.

    There is no doubt that long-term loans are tempting, especially because customers can enjoy the flexibility of lower monthly payments.

    With a majority of lenders willing to offer long-term car loans, the number of vehicle buyers opting for these types of loans has experienced an enormous increase over the last decade.

    As per the latest data, almost two-thirds of all new car loans in 2019 had repayment terms stretched beyond 5 years.

    Here’s the thing – a long-term car loan means you gain the flexibility of lower monthly payments, but it also means that you’ll be paying more interest over the life of the loan.

    Another factor that one needs to consider is that with time the resale value of the car will decrease.

    At the end of a longer term, you won’t be able to get a good value if you choose to sell the car.

    However, if you’re smart and can manage your finances well, a long-term car loan may help you improve your expense management.

    Long-Term Versus Short-Term Car Loans

    Among the major differences between longer and shorter loan duration, short-term car loans will almost always be accompanied by a lower interest rate when compared to long-term loans.

    It’s better to consider both positive and negative aspects before making a financial decision.

    On average, car loans are structured in 12-month arrangements.

    In the US, an average new car loan term is close to 65 months.

    Though borrowers can save on the interest rates by shortening the loan life, short-term loans aren’t necessarily the best for borrowers with lower income-to-debt ratios.

    It’s also difficult to afford a high-end car with short-term loans given that the monthly payments will be higher.

    Long-term car loans also come with their own set of benefits and drawbacks.

    While you can access lower payments overall, you’ll end up paying more interest by the end of the loan term. Here are the pros and cons of long-term loans that you should first consider.

    Pros of Long-Term Car Loans

    Lower Monthly Installments - When you opt for a long-term car loan, you’ll get the flexibility of a lower monthly payment.

    You can use the excess funds to pay off other debts and possibly improve your credit score with consistent payments.

    Afford An Expensive Car – The extended term also allows borrowers to buy a more expensive car than may be possible with a short-term financing option.

    Since the repayment duration is longer, borrowers find it easy to manage funds and upgrade to a better model.

    Easy to Refinance – You have the added option to refinance the car loan.

    If you get better rates, you can easily refinance the existing plan and lower your monthly payments even further.

    Cons of Long-Term Car Loans

    Higher Interest Rates – The interest rates on long-term car loans are comparatively higher.

    Although you will be paying lower installments for a longer duration, eventually you’ll end up paying more than you would’ve paid in a comparable short-term loan for the same amount.

    Depreciation Value – Cars feature amongst the highest depreciation values.

    With long-term loans, you’ll face a situation where the amount due to the lender might be higher than the resale value of the car.

    Risk of Going Upside Down - Being upside-down on car loan means you owe the lender more money than the car is actually worth.

    You risk being upside-down on the car for a longer period when you choose a long-term car loan.

    Gap Insurance – When you choose a long-term loan, you might also end up buying gap insurance to cover the risks of going upside-down.

    Long-Term Car Loans – Possible Alternatives

    Depending on your financial situation and preferences, a long-term loan might not be the best option for you.

    If it looks like the right strategy based on your financial circumstances, here are some ways to ensure you save more in the longer run:

    • Pay a higher down payment
    • Negotiate the upfront fee
    • Refinance the loan if you are offered a better rate
    • Choose a lower-priced car, a used car or a more budget-oriented model
    • Get pre-approval
    • Use loan calculators to compare estimates from multiple lenders

    Bottom Line

    To sum it up, choosing the best car loan depends on your personal preferences. T

    o be able to get the best possible rates, you should be informed on all aspects and do your homework to compare the most ideal borrowing options.

    If you’re serious about taking a long-term car loan, make sure you negotiate on the price of the vehicle and even the financing fees, whenever possible.

    Ultimately, you don’t want to end up paying way more than the actual cost of the car so it’s better to first consider all available options before making a final decision.