In recent years, technology and the increase in vehicle sizes have driven up the costs of new cars. To combat these rising costs, consumers are extending loan terms, sometimes extending them up to 84 months. But, opting for smaller monthly payments without considering the overall cost can be a risky practice. This is especially true if bad credit forces you to resort to risk financing.
According to Edmunds.com, average loan terms hit a record high of 69.3 months in June of this year. 20 years ago the most popular loan term was 48 months and here at Auto Express Credit we agree that this is still the best bet. This is because the tendency to extend the loan term between 73 and 84 can end up costing you thousands of dollars.
The hidden costs of lower monthly payments
When you have credit problems and finance a vehicle with a subprime auto loan, you should expect to pay more in interest costs than with a conventional auto loan. It is simply a matter of financing, as interest rates are based on risk – lower credit scores mean higher risk for the lender. Plus, as your loan term lengthens, more of your payments will go toward interest charges, leaving you in negative territory longer.
Having negative equity can affect your ability to trade in or sell your car. The goal of any vehicle loan should be to pay off the loan balance faster than the vehicle can depreciate. Depreciation, which is the loss in value of your vehicle, occurs every time you drive your car. As a vehicle ages, it may require more expensive repairs. With an 84-month loan term (that’s seven years), you could still pay off your car when major repairs might be needed.
Obtain a vehicle for the shortest term
A lower monthly payment over a longer period of time may allow you to buy a more expensive vehicle, but it may not be a wise decision. You need to consider your financial future, not just your monthly budget, when shopping for a car loan. Aim to make the highest payment you can afford for the shortest amount of time.
These tips will help you keep the big picture in mind:
- Know your budget— Having a solid understanding of your budget will help you know exactly what you can afford to pay each month for a car payment. Remember to include the total cost of owning a car when planning. Items such as fuel, maintenance and insurance should be taken into account.
- Pick a car you can afford—What you want and need are rarely the same, so be sure to choose a vehicle that meets your needs. A good choice is to start the process online, where you can take advantage of online tools that can help you. Using an online auto loan calculator will help you know what to expect when it comes to monthly payments.
- Calculate an affordable payment— A potential lender will use a payment to income ratio (PTI) when determining your loan. You can find this amount yourself by adding an estimate of the payment for a car and insurance, and dividing it by your monthly gross income. Your answer will be what percentage of your income will go towards a vehicle. The general rule is that your car payment should not exceed 20 percent of your monthly income.
- Be prepared to make a down payment— A down payment is an easy way to shorten the term of your loan. Paying between 10% and 20% of the price of your car up front will lower your interest charges and make it easier to manage monthly payments as it reduces your loan amount.
The bottom line
A loan term that gives you a lower monthly auto loan payment can be misleading. If you look at the big picture, you might be paying more for your car than you anticipated. A good tip for saving money is to keep your loan term as short as possible. Auto Express Credit wants to help you do that by putting you in touch with a reseller that’s right for you!
When you have bad credit and need a new vehicle, let Auto Express Credit be your go-to source for special financing dealers. Our dealer network has the loan resources available to help people with various types of bad credit situations. It’s free and easy to take the first step, just fill out our online auto loan application form.