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How Long Should a Car Loan Be?

The length of a car loan depends on several factors, all of them highly personal.

The first factor determining how long a car loan should be is your personal budget. While you should never tell a car salesperson how much you can afford on a monthly basis, you need to be aware of it. It needs to be an amount that fits comfortable into your budget. The actual payment is only a small part of the equation. You need to consider how much your insurance premiums are going to increase, will you need more fuel, etc. Most experts recommend that you dedicate no more than 10% of your monthly income to a car payment. A healthier percentage is just 5-8%. It’s been found that spending more than this could strain your budget, leading to a greater risk of default and repossession.

Lower Monthly Payments Versus Greater Total Interest

Once you have considered your budget, it is time to think about the wisdom of a long term loan. Longer loans give you lower monthly payments for the same amount, but they come with higher interest rates. Let’s say you want a loan for $18,000. A three year loan on that amount may only carry a 6 percent interest rate. The payment would be $539.48 and you would pay a total of $1,421.14 in interest. Now, that same loan extended to 6 years would most likely require an interest rate of 7.5 to 9 percent interest. At 7.5 percent, your payments would be $311.22, but you would have to pay a total of $4,407.99 in interest. That is a difference of nearly $3,000. Would the lower payments really be worth the lower payment?

Depending on your credit score, you may find it difficult to get a car loan with extremely long terms. Your best option is to shop around for the best possible loan. Start with the institution where you have your checking and savings accounts. Always consider the possibility that an online lender may offer you the best terms for your situation. Shopping your loan can save you money in total interest paid and you may find a better loan length.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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