Over the last several years, technology and increasing vehicle size has driven up new car costs. To combat these rising costs consumers are stretching loan terms, sometimes extending them as long as 84 months. But, opting for smaller monthly payments without considering overall cost can be a risky practice. This is especially true if bad credit has you needing subprime financing.
According to Edmunds.com, the average loan term reached an all-time high of 69.3 months in June of this year. 20 years ago, the most popular loan term was 48 months and here at Auto Credit Express we agree that is still the best bet. That’s because the trend of extending loan length between 73 –84 can end up costing you thousands.
The Hidden Costs of Lower Monthly Payments
When you have credit challenges and finance a vehicle with a subprime auto loan, you should expect to pay more in interest charges than you would on a typical car loan. This is just a fact of financing, because interest rates are based on risk—lower credit scores mean a higher risk for the lender. Also, as the length of your loan stretches, more of your payments will go toward interest charges, leaving you in negative equity territory longer.
Having negative equity can affect your ability to trade-in or sell your car. The goal of any vehicle loan should be to pay off the loan balance faster than the vehicle can depreciate. Depreciation—your vehicle’s loss in value—happens every time you drive your car. As a vehicle ages, it has the potential to need more costly repairs. With an 84 month loan term (that’s seven years), you could still be paying for your car when some major repairs might be needed.
Getting a Vehicle for the Shortest Term
A lower monthly payment over a longer period of time may allow you to buy a more expensive vehicle, but it may not be wise decision. You should consider your financial future, not just your month to month budget, when shopping for an auto loan. Aim for making the largest payment you can afford for the shortest amount of time.
These tips will help you keep the big picture in mind:
- Know your budget— Having a solid grasp on your budget will help you know exactly what you can afford to pay each month for a car payment. Don’t forget to include the total cost of owning a car when you plan. Things such as fuel, maintenance and insurance should be taken into account.
- Pick a car you can afford—What you want and what you need are rarely the same, so make sure you choose a vehicle based on your needs. A good choice is to start the process online, where you can take advantage of online tools that can help. Using an online auto loan calculator will help you know what to expect when it comes to monthly payments.
- Calculate an affordable payment— A potential lender will use a payment to income (PTI) ratio when they are determining your loan. You can find this amount yourself by adding an estimated car and insurance payment, and dividing it by your monthly gross income. Your answer will be what percentage of your income will go toward a vehicle. The general rule of thumb is your car payment should not exceed 20 percent of your monthly income.
- Be prepared to make a down payment— A down payment is an easy way to shorten the term of your loan. Paying anywhere from 10 to 20 percent of your car’s price upfront will reduce your interest charges and make monthly payments easier to manage because it lowers the amount of your loan.
The Bottom Line
A loan term that gives you a lower monthly auto loan payment can be deceptive. If you look at the big picture, you may be paying more for your car than you bargained for. A good tip for saving money is to keep your loan term as short as possible. Auto Credit Express wants to help you do just that by matching you to a dealer that is right for you!
When you have bad credit and are in need of a new vehicle, let Auto Credit Express be your go to source for special finance dealers. Our network of dealers has the lending resources available to help people in various types of bad credit situations. It’s free and easy to take the first step, just fill out our online auto loan request form.