How Long Should A Car Loan Be?
Monthly car loan payments today can seem like the mortgage payments of a couple of decades ago, and most average loans for new cars now are around $500 (plus)
a month, or more. Consumers today are purchasing new, high-end and larger vehicles that reflect higher sticker prices, which has future new car owners thinking about securing longer vehicle loans. Sometimes those high monthly payments can be a bit much for most any budget, so how long should a car loan be, anyway?
Average Loan Duration
The average car loan period is currently 72 months and it looks as though an 84 month loan duration is in the works. Most loans for new vehicles were originally for 60 months with 72 months following that. Even used car loans can run around the same amount of time (at 72 months) and that is with quite a bit less money being financed for a used vehicle, but it takes that period of time to even pay off a used vehicle.
Credit reporting agencies note that many potential new and used car owners are looking for decent interest rates with manageable monthly payments. A five-year loan can bring a large monthly payment and that is one reason why consumers resort to taking longer loan stretches to afford the cost. In the long run, they end up paying more in interest to pay for a vehicle.
Most financial experts don't advise assuming a car loan that is longer than six or seven years. There are reasons why a five-year or 60 month loan period is recommended. Here are a few reasons why that amount of time is suggested:
The length of a loan is going to determine the interest rate, and the longer the loan, the higher the rate will be. The loan will include both the rate of the loan for the number of months/years and any finance charges over that time period.
60 Month Period Loan
Say a car or other type of vehicle is being financed for a 60-month period as opposed to a 72-month period. The average amount financed by a new car owner on a 60-month loan is in the $31,000 range and the rate of interest is round 3.2%, which brings a monthly payment to over $550 and a finance charge of around $2500. This close to $600 a month payment is a hefty bill that could seriously cut into a person's income, so it is understandable why a new car customer would look to a lengthier loan.
72 Month Loan Period
A loan of 72-months or 6-years is obviously a longer loan period, and such a loan would carry a higher interest rate that would be around 7 percent. The average 31,000 figure for loan backing would lower the payment to a little more than $500. This figure may seem to be one that is workable, but the finance charges to carry the loan would be close to $7,000 during the 6-year duration of the loan. It' easy to figure out that the is considerably more interest than the 60-month loan.
Used Vehicle Loans
Used cars loans follow somewhat the same pattern, as the average financing today for used car loans is almost $22,000, which would equal out to a payment of almost $400 a month. That looks to be a workable figure, but interest rates are considerably higher for used vehicles. The rate of over 9 percent is somewhat normal, so the finance charges alone would be close to $7,000.
There are other factors to consider with vehicle financing that include:
- The depreciation of a vehicle over a loan period
- The resale value of a vehicle once a loan is complete - (a five-year old vehicle is going to bring a higher value as opposed to a seven-year old vehicle)
- The negative equity- total down payment affects the amount of negative or positive equity in a vehicle
Ways Around Costly Vehicle Financing
There are ways to reduce monthly payments when five, or even seven-year vehicle payments are out of the reach of a person's budget. Car payment or car affordability calculators are available to any potential vehicle owner. They help car buyers determine what cars and lower payment options are available to them. It's a simple process and can be found online. All that is necessary is to insert a workable monthly amount and cars in that price range will be made accessible.
Another alternative is purchasing a used vehicle. Though the interest rates are higher, used vehicles are lower in cost, so there is less of a loan to carry and any payments will be lower. It is advisable, however, to always carefully review any terms in the loan to determine if there are added charges and costs in the agreement.
Length of a Car Loan
In terms of how long a car loan should be, reviewing loan terms for five, six and more years is the first step. Shorter terms (even less than five years) are always advisable but what is an affordable monthly payment amount to a car buyer should always be first in determining financing.
Secondly, every contract involving a car loan should be carefully reviewed to determine the exact amount that a car buyer is paying for the vehicle. Other rules that go along with and govern financing include putting down a substantial down payment (20 percent) and keeping any payment around 10 percent of total (monthly) income.
Whether you are shopping for a car loan for a new or used car, and are not sure what is the best financial approach for your budget situation, complete the online contact form and a financial expert will get back to you with the information you need to make an informed decision.