Types Of Auto Loan Terms

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January 27, 2012

Auto loan terms vary widely in lengths of time and payment amounts. In addition, the term of an auto loan can affect the interest rate, amount of total interest paid and the overall price of purchasing a new or used vehicle. Therefore, it is important to understand the types of terms available with most new or used car loans and how they can affect the amount you actually pay. Listed below are types, and descriptions, of auto loan terms normally available when purchasing a new or used car:

Short Term Auto Loans

Short term auto loans are loans made for the purchase of a new or used car and have payment terms of 12 months (one year) up to 36 months (three years). These types of loans are designed to help a consumer quickly pay off a loan obligation for a new or used car purchase. However, the payment amounts of shorter term loans can be somewhat high or burdensome for some.

Short Term Auto Loans generally offer lower interest rates than do longer term loans; however, this is not always the case. People with bad credit may be required to use shorter term loans in order to be approved by certain auto loan lenders. In these cases, interest rates can be somewhat higher than normal as people with bad credit can sometimes be expected to "buy back their auto credit". Under these circumstances, short term loans enable a person, with bad or poor credit, to re-establish his or her credit history. Dealerships that specialize in short term auto loans for people with bad credit are many times the "Buy Here - Pay Here" type dealerships you may encounter.

While short term auto loans are often used for people with bad or poor credit, those with good or excellent credit will often opt for these types of loans as well. People with excellent credit can often get very low interest rates with these types of shorter duration loans; because of the relatively cheap cost of credit for these type of consumers, it makes sense for them to defer total payment of a vehicle for two or three years.

Advantages:

•Quick payoff of a car loan obligation
•Increased trade-in value after the completion of the loan
•Much lower interest payments and lower overall cost of ownership

Disadvantages:

•High or expensive individual monthly payments
•May require additional sacrifices to afford higher monthly payments
•May be difficult to sustain if the customer loses a job or income

Long Term Auto Loans

Long Term Auto Loans are usually car loans that have payment terms longer than 36 months (three years) up to about 84 months (seven years). Longer duration auto loans are designed to allow customers to make smaller, more affordable monthly payments on a car or truck.

While the individual monthly payment amounts are much lower with long term auto loans, the amount of interest paid over the life of the loan increases dramatically. The increased accrued and paid interest can substantially increase the overall cost of ownership with a new or used car or truck.

Advantages:

•Smaller and more affordable monthly payments
•Frees up money for other obligations and expenses
•May be able to be sustained if a customer loses a job or income

Disadvantages:

•Car or truck may be little, or significantly reduced, trade-in value at the end of the loan term
•Substantial increase in amount of interest paid and accrued
•Increased overall cost of ownership

When making your next used or new car purchase, carefully consider the term options available to you. You should always choose a term that allows for a payment well within your budget. At the same time, choose a term that allows you to pay off an auto loan as quickly as possible.

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