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Buying a car is a significant investment and financing it with a loan is a common way to spread the cost over time. But how long should you finance a car? This decision can have a major impact on your monthly payments, the total amount of interest you pay and your overall financial situation.
Understanding Loan Terms:
The normal duration of a car loan is between 24 and 84 months, however some lenders offer terms as long as 96 months. The longer the term, the lower your monthly payment will be. However, you’ll also pay more interest over the life of the loan.
Factors to Consider When Choosing a Loan Term:
- Budget: Your monthly budget is a crucial factor in determining how much you can afford to spend on a car loan payment. Experts recommend keeping your car payment below 20% of your take-home pay.
- Credit Score: Your credit score will affect the interest rate you qualify for. A higher credit score will typically lead to a lower interest rate, allowing you to choose a shorter loan term without significantly increasing your monthly payment.
- Down Payment: Making a larger down payment will reduce the amount you need to borrow, which can give you more flexibility in choosing a shorter loan term.
- Car Ownership Goals: If you plan to keep your car for a long time, you may want to choose a shorter loan term to pay it off faster and avoid being upside-down on the loan. If you plan to trade-in your car frequently, a longer loan term may be more suitable.
Pros and Cons of Long-Term Loans (72+ Months):
Pros:
- Lower monthly payments
- More affordable for expensive cars
Cons:
- Higher total interest paid
- Risk of being upside-down on the loan
- Less flexibility to trade-in or sell the car
Pros and Cons of Short-Term Loans (36-48 Months):
Pros:
- Lower total interest paid
- Quicker ownership
- More flexibility to trade-in or sell the car
Cons:
- Higher monthly payments
- May limit car choices to less expensive models
NerdWallet’s Recommendation:
NerdWallet advises limiting the length of time you can finance new cars to 60 months and used cars to 36 months. This balance minimizes the total amount of interest paid and the possibility of being upside-down on the loan, allowing for manageable monthly payments.
Additional Tips:
- Shop around and compare loan offers from multiple lenders to find the best interest rate.
- Consider getting pre-approved for a loan before visiting dealerships to strengthen your negotiating position.
- Make a larger down payment if possible to reduce your loan amount and monthly payments.
- Be realistic about your budget and choose a loan term that you can comfortably afford.
Choosing the right car loan term is a personal decision that depends on your individual circumstances and financial goals. By carefully considering the factors discussed above, you can make an informed choice that fits your needs and helps you achieve your financial objectives.
Additional Resources:
- Bankrate: What’s the Average Car Loan Length?
- Edmunds: How Long Should a Car Loan Be?
- NerdWallet: How Long Should You Finance a Car?
- Experian: State of the Automotive Finance Market Q2 2023
Disclaimer: This information is intended for general informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any decisions about your car financing.
How long should you finance a car for?
It depends on how much of a monthly loan payment you can afford. A lengthy term makes the monthly loan payment more affordable at the expense of steeper borrowing costs.
Here’s a step-by-step breakdown to help you find the loan term that works best for you.
- Determine your budget. Think about how much you want to spend on the car itself as well as your monthly spending plan. Financial advisors advise devoting no more than 20% of your take-home income to your auto loan payments. Also, consider whether your financial situation is likely to change. For instance, you might prefer a smaller monthly payment if your job security is uncertain.
- Get prequalified. Look around for the best deal by obtaining prequalification from at least three lenders. Start with your local bank or credit union if you have an account there. Because of the quality of your current relationship with the lender, you may be eligible for favorable terms.
- Analyze borrowing costs. To see your estimated loan payment, enter your prequalification results into an auto loan calculator. To see how much you will pay each month and how much interest you will pay overall for each loan term, you can also view the amortization table.
- Make a decision. When selecting the loan term that best meets your needs, take into account both the monthly payment and the total cost. Once you’ve chosen the ideal fit, apply to the lender to have your financing preapproved. A formal promise from a lender to lend you money is known as a preapproval for a car loan. It also helps you negotiate more effectively with the dealer.
Learn more:
The table below illustrates how your choice of term can affect interest rates and monthly payments over the course of the loan. The figures are based on a $40,000 loan with a 6. 5 percent interest rate.
| Term | Monthly payment | Total interest paid |
|---|---|---|
| 36 months | $1,226 | $4,135 |
| 48 months | $949 | $5,533 |
| 60 months | $783 | $6,959 |
| 72 months | $672 | $8,413 |
| 84 months | $594 | $9,894 |
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