Deciding on a loan term is an important decision that affects a borrower’s finances. What are the biggest differences between short- and long-term car loans?
Short-Term Loans
There are more benefits than drawbacks to a short-term auto loan, which is classified as 48 months or less. There are two main cons to having a short term: the possibility of a higher down payment and higher monthly payments. Not everyone is going to have the funds needed to cover high monthly costs, so in return lenders often ask for a higher than average down payment. The bigger down payment and higher monthly costs could put a borrower’s finances in a bind.
Conversely, the benefits of taking out a short-term loan are plentiful:
- The shorter term and the fact that the balance is paid off sooner saves the buyer money in interest charges.
- Once the car is bought and driven, depreciation kicks in. However, with a shorter loan term, the vehicle will have a higher resale value once paid off.
- Borrowers will be upside down for less time. With the higher monthly payment being applied to the principal and not interest, the borrower decreases their chances of being upside down, which gives them flexibility when it comes to selling or trading in their vehicle.
Long-Term Loans
When it comes to long-term loans, a lower monthly payment doesn’t mean a cheaper loan. The borrower will be making payments for a longer period of time, and more interest charges will be paid over the loan term.
Additionally, the longer term often means the buyer will have negative equity, meaning they owe more than the car is actually worth. This can create issues if the vehicle is totaled or stolen, or the buyer needs to sell or trade it in before the term is up. The difference won't go away, and the buyer will have to make it up one way or another. Also, even when the loan is paid off, the vehicle could have a lower resale value following a long term.
Car buyers explore extending their loan term because it leads to lower monthly payments, which may allow them to purchase a nicer vehicle by spreading the cost out over a longer period of time. While it can open up options, always remember that a long-term loan always means a higher total cost of financing due to increased interest charges.
Bottom Line
Not everyone can afford a short-term loan and, for many, a long-term loan may be the only viable option. Just be aware of the downsides of having a longer loan term and plan accordingly.
If you’re struggling with bad credit and need to find a local special finance dealer, let CarsDirect help. We work with a nationwide network of dealers that have the lending resources available to help. Our process is free of cost and obligation. All you have to do is take the first step by filling out our online auto loan request form today.