Besides your mortgage, buying a vehicle may be the next largest expense in your financial life. It is sometimes ideal to be able to pay cash for vehicles and save on the interest charges, but many people need to take out a loan to purchase their vehicles. Car loans are usually figured in the number of months on a yearly basis, in other words a two year loan would be a 24-month loan, three years – 36 months and so on. Most car loans are in the 36 to 60 month range. The longest is about 72 months, or six years.
There are some things to consider to see what option works best for you. It would probably be best to pick an option you can afford and pay it off as soon as you can so you don’t end up paying so much in interest payments. Suze Orman suggests the time frame as a three-year loan to determine if you can afford a car or not.
One advantage of the longer term is lower monthly payments. However, you will be paying more in interest because you are making payment for a longer period of time. One of the main disadvantages of a longer term is that over time you may owe more on your vehicle than it is worth. Vehicles depreciate very quickly, especially newer ones. If you have a five or six year loan, and are only a few years into the loan and have an accident, then your loan balance may be higher than the amount you receive from your insurance.
Another thing to consider is how often you trade in your vehicles for new ones. If you like purchasing a new vehicle every two or three years, then it is advised to have the current one paid off before trading up. Some dealers will take the balance of your current vehicle and add it into your new loan, but in these cases you are paying for your new vehicle as well as the vehicle you are no longer using.
Look at interest rates and if there are specials being offered. At some times, dealers will offer low or no interest on certain vehicles for a certain term loan. Most of these are offered on new vehicles. It is important to consider if the savings of interest is worth the increased price you may pay for a new vehicle.
When purchasing a vehicle and taking out a car loan, one of the many things to consider is where you plan to be in your life and how the payments will fit into your life for the next three to five years.