By M. O’Neil
When it comes to buying a car, most people have an idea of what monthly payments will fit their budget, and what they target when making a deal. However, majority of the buyers lose track of the bigger picture; the total cost of the car and the length of time it will take to clear the loan. For the past decade, the average car loan term has slowly crept past three years, and is now close to four or five years. Majority of buyers opt for a long time span loans. The benefit for such a move is the lower payments one will be making each month. It is important to consider the following reasons before opting for long-term car loans.
Higher Interest Costs
The longer you finance a car, the more interest you will have to pay on it. It is better to choose a three-year car loan than going for the long term five-year car loans. The monthly payment for a five-year car loan is normally lower than that for the five-year loan term. The finance charges for the car loan, however, might be more than double the amount one pays for a five-year loan. In addition, one will also have two more years of car loan payments.
As soon as the car leaves the showroom, it begins to depreciate quickly. Hence, at the beginning of a car loan, the buyer is typically “upside down,” or “under water”. This means the buyer owes more than the car is worth. The situation is made worse if the buyer has not made a large enough down payment. The time it takes you to get “above water” and build equity in the car will vary, based on the car you bought and amount of a down payment made. However, one thing does not vary; the longer your car loan, the longer it will take you to build equity.
When you have no equity in the car, you cannot sell if it you need the money in an emergency. It also gives you fewer options if you get tired of the carw. A buyer will only pay you what the car is worth, not what you owe on it. You are stuck with the balance of the loan. Similarly, if you get into an accident and write off the car, the insurance company will only pay you what the car is worth at the time of the accident. The remainder of what you owe will have to come out of your pocket. This value is called pre-accident value. Ensure that your car is valued every year before taking insurance.
Our love for the car we have brought is at its highest level when the car is brand-new. The romance quickly fades when we notice something better. Our anxiety rises when we want to trade in our car for something new. If you have a five-year loan and get the itch to buy a new car around the four-year mark, you will have to wait another year to trade in. The other alternative is to roll the balance of the loan into your next car purchase. However, note that this is an extremely bad idea, as it adds up to an even longer loan commitment and higher monthly payments.
Low Resale Values
Resale value is another reason to avoid extra-long car loans. A three-year-old car is more desirable and more valuable in the used-car marketplace than a five-year-old vehicle. A dealership will likely give you more money for the three-year-old car. At that age, it is a great candidate for the certified-pre-owned process, which means the dealer will have a more valuable car to sell. On the other hand, a five-year-old car has too many kilometres on the dial and one will earn less deduction for a trade-in compared to a newer car.
If want to buy a new car but the monthly payments that are being quoted for the usual three-year loan are too high for you, you’re shopping outside of your price range. You also could consider buying a used car. Interest rates are a bit higher for used cars, but since the cars cost less, there is less to finance and the payments will be lower. Take a look at all the numbers in the sales contract before you make that crucial final decision in taking a car loan.