Home Finance Why Long-Term Car Loans Might Not Pay Off In The End

Why Long-Term Car Loans Might Not Pay Off In The End

The mistake that many car buyers make when they are financing a car is to choose one and then try to fit the payments into their budget every month. Instead of focusing on how much the car is worth, those shopping for vehicles often find the car of their dreams and then go to work figuring out a way to afford it. The best way to stay within budget is to have a price in mind and not go above it. That involves figuring out how much you have to spend monthly according to your financial situation.

There are many options for car financing. When working with a car dealership, clients have many financial institutions to choose from, or they can find a loan through an independent traditional institution. There are many advantages to using a car dealership for financing options, especially if your credit rating or credit history is not so stellar — but sometimes you can get yourself in some financial hot water if you don’t plan well and make good decisions. If you base your decision on emotional wants, you will always end up losing.

When it comes to car loans, there are all types of repayment plans

Sometimes to get a customer into a higher-priced car, financiers will offer longer repayment terms, upwards of 72 months or more. Although this reduces the amount that you have to pay every month, taking on a longer-term loan may not always be your best option. Sure, it might get you the car you have always dreamed of at a fit within your budget, but over the length of the loan, what you have to know is that the car will end up costing you a whole lot more.

The best way to buy a car is by financing it for the shortest period possible. The longer the repayment term you take out, the more you will pay in interest for the car, which will have you paying a considerably higher amount that will not be worth it in the end. The difference between financing for 48 months versus 72 months can be thousands of dollars in some cases, which just doesn’t make good financial sense.

When you drive a new car off the dealership lot, 20% of the car’s equity is lost within the first year. That means that you are better off buying a car that is two to three years old. That way the car has already depreciated at a rapid rate and is worth less in equity, but it is not much different from a new car regarding the upgrades, the condition, or the options. The only real difference is that you are getting a car that will depreciate less. In the end, should you want to trade it in or sell it, you will get back close to what you paid for it.

What happens if you take out a long repayment term?

If you take out a long repayment term, then you are only paying down a very small amount of the principal each month. Since you’re paying mostly interest, when you go to sell or trade in the car, you will have barely any equity in it. The truth is that when you take out extremely long repayment terms, it is more like renting the car. In some instances, when you go to sell it or trade it in, because you have only made minimal payments toward the principal, you might end up owing more than you have paid or being upside down on your equity, which can be very upsetting.

If you simply can’t afford to make car payments and you need to go for a longer repayment term, then make sure to compare many different lending institutions to find the one with the lowest interest rate. There are times when you have to do what you have to do. But be smart and consider whether it would behoove you to buy a less expensive car and go for a shorter repayment schedule rather than to put yourself in a position where you can get into financial trouble.

When you go to a Langley dealership, make sure that you have a budget in your head and try to stay within it. Don’t get too excited and stretch that budget to the point where you are going to be paying for your car forever, or risk ending up with a car that you owe more for than it is worth in the end.