Balancing Your Loan Term and Monthly Car Payment

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - December 17, 2020

When you're getting a bad credit auto loan it may be tempting to take out the longest loan term your can. When you do, it can significantly lower your monthly payment, but it might raise the overall cost of the loan – you may even risk paying more for the car than it's worth.

Balancing Your Car Loan Term and Payment Amount

As a bad credit borrower who's likely to see a higher than average interest rate – around 13% on average according to a recent survey of our dealer network – it's a good idea to find balance. We’re talking about the balance between how much you want to pay each month, and how long you want to make those payments for.

Often, you may not qualify for the shortest loan term when you have poor credit, but it's key to stand your ground and go into your auto loan financing with a figure in mind.

Be careful when you're negotiating with a dealership though! Some dealers ask you up front how much you're looking to pay each month, and may offer you a vehicle that's too expensive for your budget. By suggesting a longer loan term, they can bring the monthly payment into your range, because loan term and monthly payment amount are two things on either end of a seesaw.

Balance is possible by adjusting both the time and the amount, so you need to know what your limits actually are. We recommend taking out the shortest loan term you can that gives you a payment you can comfortably afford each month.

How Auto Loan Terms Impact Financing

The length of time you're paying on your car loan is known as a loan term. They typically last between three and eight years, and are expressed in months. This means you typically find auto loans advertised as being 36, 60, or 84 months – rather than three, five, or eight years.

When you're financing a car loan the longer your loan term, the lower your monthly payment is. However, since almost every auto loan includes interest, or the cost of borrowing money, the longer you stretch your car loan, the more you pay overall. Also, this means that the higher your interest rate is, the more it costs for your auto loan.

Because interest charges can stack up quickly, it's a good practice to try and balance your loan and your monthly payment amount. If you're only concerned with how much you pay in a month, you could be shooting yourself in the foot when it comes to interest charges and the overall cost.

Payment Shoppers Beware

If you're only concerned with getting the lowest possible monthly payment for your car loan, and aren't concerned with the total cost, you're considered a payment shopper. Being a payment shopper may work if money is no object, but that's not the case when you're struggling with credit issues.

One reason this is so important for bad credit borrowers has to do with car equity. Equity is when your vehicle is worth more than what you owe on your loan. Equity can be turned into cash value should you want to sell or trade in.

However, if you stretch your loan term to get the lowest payment each month, you're likely to owe a larger amount on your loan for longer, and the value of the vehicle could stay far below what you owe for years to come. When you owe more for your car than it's worth, you have negative equity.

Also called being underwater on the auto loan, having negative equity can make it more difficult to sell or trade in your vehicle. Because you don't get enough to finish paying your loan with a sale, you either have to cover the difference out of pocket, wait, or roll the negative equity into your next loan.

Quick Calculations to Keep You on Budget

If you're not sure how to go about figuring out your car financing budget, you can use our Car Loan Calculator. It's also a good idea to know what lenders are looking for when it comes to a borrower's budget.

Subprime lenders that can work with lower credit scores do a few calculations of their own: your debt to income (DTI) and payment to income (PTI) ratios. These ratios tell the lender how much available income you have after paying all your existing bills, and how much of that income is being used by your auto loan and car insurance payments combined.

In order to qualify for an auto loan approval, subprime lenders typically require that your DTI is no more than 45% to 50%, and that your PTI is 15% to 20% or less. The specific amounts vary by lender, but, in all cases, the lower your percentages, the better.

If you're interested in calculating your DTI and PTI before you continue the car loan process, you can learn how here.

Ready to Find Your Next Car Loan?

Now that you know how important it is to balance your loan term with your monthly payment, it's time to find the auto loan you're looking for. You can shop for vehicles right here on our new and used car pages, or go straight into finding the dealership in your area that has the lending resources you need.

Here at CarsDirect, we've put together a coast-to-coast network of special finance dealerships that are signed up with subprime lenders. These lenders look at more than just your credit score to get you the financing you need. Get started toward your next vehicle today by filling out our free, no-obligation auto loan request form.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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