Cause For Concern
Often, opting for the long-term loans does make sense at first. However, as you dig deeper, it normally gets even more expensive.
Say you have, at last, found your dream car and gone down to the dealership to purchase it. However, after you discover the total drive home price of the car,
you realize that you will not be able to afford it. Nevertheless, just then, the salesman has a moment of inspiration and recommends a 72-month auto loan.
If you take that long-term plan, you will have to pay a lower amount of money per month. However, while you are at it, you will also have to pay an amount of interest, which will increase as times go by.
So, depending on the interest rate, overall you will have to pay around 20% more than what you could have spent with a shorter term deal.
Reasons To Avoid Longer Terms For Auto Loans
There are several reasons out there, which make most people avoid longer-term car loans. Here are some of them:
- Your Car Loses Its Value - According to recent research, an automobile tends to lose almost 10% of its overall value the moment you purchase it. After that, it will keep losing its market value by 25% each year.
- Negative Interest Equity Cycle - When following a long-term plan, you will have to pay a high amount of interest too. Moreover, sometimes, automobile lenders also tend to include the value loss amount of a car on the interest. So, in that case, you will have to pay even more money without any good reason.
- You Will Have To Pay For The Repairs - An older car requires a lot of maintenance. It would likely require new brakes, tires, as well as a lot of other unexpected repairs. Therefore, while you are paying a high amount of capital for your four-wheeler, it might become even more difficult for you to spend any extra cash on maintenance. Furthermore, if you have chosen an extended period of warranty, then your monthly payment would be even higher.
When you are thinking about opting for a long-term borrowing plan, make sure to keep all these factors in your mind.
How To Avoid Paying More
While long-term auto loans carry a number of negative factors, there are some positives as well. You can turn the direction of the tide quite effectively if you follow a few strategies meticulously. Here is how:
- Pay A Large Down Payment - If you do make a large down payment at the beginning, then your payable amount per month will be reduced quite substantially. Therefore, the overall amount of your loan would also be reduced. This might convince the dealership to reduce your APR, which would lower your risk of paying too much.
- Opt For A Cosigner - If you do add a cosigner to your loan, it may easier for you to pay it off more quickly. Moreover, with a cosigner in your corner, your overall good credit would also increase, which, in turn, might push the lender to provide you a more affordable rate. However, before you opt for a cosigner, you should make sure to reveal all the details about the loan to them. Keeping them in the dark would not be a good strategy.
- Consider The Status Of Your Bank Balance - If you are opting for something long-term, then you would also have to consider your bank balance as well your employment and salary outlook. This will help you to estimate the loan period that would be right for you.
- Try To Choose A Shorter Term - A short-term loan period would increase your monthly payable amount quite substantially. However, it will also ensure that you do not have to pay the money-draining interest for a prolonged period. Therefore, the overall amount you will have to pay will hypothetically drop too.
Paying a loan, especially a car loan, can be a daunting task for almost anybody. If you are not careful, then you might also start overpaying during the process.
This, in turn, can affect your bank balance quite noticeably.
Therefore, it is important that you plan your steps as meticulously as possible to avoid the potential risks.