Deciding on a Longer Term or Higher Monthly Payment
Questions to ask yourself before choosing an auto loan
Equifax recently reported that new auto loan origination totals for the first six months of 2011 were up 15 percent since 2010. While this is encouraging news for the industry and may entice drivers looking to buy a new vehicle, there is a major item that must be considered before you get your loan: how long do you want your loan term to be?
There are benefits and drawbacks to both long-term loans with low payments and short-term loans with high payments but lower overall interest. Here are some questions you should ask yourself to help make the decision:
Can You Afford a Higher Payment?
Your budget will hold a lot of sway in the decision about loan terms. If you can’t afford to commit to a higher payment, then choosing a longer term with payments stretched out over additional months or years can mean the difference between affording your loan payments comfortably or not.
Do You Need Flexibility?
If your income varies due to commissions, bonuses or other factors, then you may not be comfortable committing to a short-term loan with large fixed payments. Instead, you can choose a longer term with lower monthly payments so that you have the confidence that you will always be able to meet that obligation – even in the face of an unexpected financial emergency. Then you may be able to make additional payments toward the principal whenever your paycheck allows, effectively shortening your term and reducing your overall interest.
Can You Still Save Money?
No matter what term you choose – long or short – your budget must still allow for savings deposits while you are paying the loan and new insurance fees. You should not ignore short- or long-term savings while you are paying off a car. Look at your overall savings goals and your budget, and use this information to determine what kind of payments you can afford.
What Is the Interest Rate Difference?
You can often get a lower interest rate on a longer-term loan. As long as there are no prepayment penalties, it could be a strategic move to get the long-term interest rate even if you can afford, and fully intend, to make the payments that a short-term loan would require. This will allow you not only to benefit from the long-term interest rates but also still pay off your loan early and save even more on overall interest.
No matter what kind of loan term you choose, it’s important to understand all the terms and evaluate the decision from several points of view. Finally, it’s good to remember that no matter what your minimum required monthly payment is, you may be able to pay more. Contact us today for any questions or concerns with your automotive loan needs.