The average length of car loans has increased over recent years, reaching up to around five years. An affordable monthly car payment should be a factor when you buy a car, but so should the length of the loan. Ideally, by the end of a car loan, you will not have paid more than the car is worth. Consider the following while deciding how long you want to be paying off a car loan.
Interest
The length of a loan's term directly affects the amount of interest you will pay. A part of every monthly payment goes toward interest that is accruing over time, which means longer loans include more money spent on just interest. As you continue to pay interest, the amount you will inevitably pay for your car will increase. The continuous interest payments can cause an over-payment for the car beyond what it will be worth at the end of the term. By paying off your car loan fast, you can avoid heavy interest payments.
Equity Depreciation
The simple fact is, depreciation of a car's equity value begins right away and does so faster than any other asset. What the car is likely to be worth, in fair market value, when you finish paying off the loan should be considered before you sign on for a long-term.
Compare what you will inevitably pay for the car, after interest is added on to the cost, to what it is expected to be worth in equity. If you are going to spend more than that eventual fair market equity, reconsider the length of your loan.
Why Long-Terms are Popular
The popularity of longer loan terms over recent years can be directly attributed to an average consumer's mindset being geared toward short-term financial planning. The longer a loan's term is, the less you will need to pay on a month to month basis. Someone trying to stretch a limited monthly income is easily convinced that these lower monthly payments are a good trade-off for needing to pay the loan off slowly over several years. The best course of action is to find an affordable balance between monthly payments and the length of a loan that will keep you from overpaying for the car, also known as "being underwater."
The average length of a car loan has gone up over the past few years, with more and more consumers choosing lower monthly payments over paying an appropriate amount for a car's reasonable equity. Carefully consider what you can afford to pay in comparison to the length of your loan before signing financing contracts.
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