How Your Loan Term Affects Your Monthly Car Payments

August 22nd, 2016 by

Buying a car can be an overwhelming process, especially when it comes to negotiating costs. With the steep prices that often accompany new and gently used cars, taking on such a large financial burden can be a little stressful. The amount of a car payment is often a big determining factor when it comes to affording a car, and acknowledging what factors play a role can be a big part of that. By understanding how your loan term makes a difference, you can save yourself money while still getting behind the wheel of the car of your dreams.

Loans and Loan Terms

Loans, like most aspects of the financial world, are not one size fits all. When you apply for a loan, the lenders queried look at details like your financial history, your credit score, and your past secured loans. From this information, an offer is generated that includes an interest rate and term options.

Most auto loans, depending on the value of the car in question, range between three and six years, although different lenders have different requirements. Some loans can be paid off early with larger payment amounts each month, while other penalize borrowers for prepayment. Be sure you understand all of the terms and conditions of your loan prior to making a term selection and signing an agreement.

How Your Loan Term Affects Monthly Payments

How Terms Affect Monthly Payment

When it comes to payment amounts, there’s more at stake than simply interest rate. The length of your loan term is also a big part of the check you write each month.

Say, for example, you purchased a car for $20,000 with six percent interest. If you chose a 36-month loan term, your monthly payment would be $608. With a 60-month loan term instead, however, you would only owe $387 a month. As you can see, a longer term comes with lower payments, making the cost of ownership more immediately affordable. There are implications in the long run, however; longer loans mean additional interest paid, costing you more over the lifetime of your loan.

Keeping Car Payments Low

When you want to make your car payments more affordable, a long loan term is certainly one way to keep costs down. Using the down payment to your advantage, however, can be another way. The more you pay on the face value of the car, the less you’ll you’ll have to ultimately borrow.


Calculate your monthly payments


If you have enough money saved or have another car to trade in you can use as a deposit, you are able to substantially lower your payments over time by paying a portion of the balance due interest-free up front. If you were to put a $3,000 down payment on your $20,000 car, monthly payments would decrease to $517 per month over a 36-month term, and to $329 over 60 months – a big savings!

Buying a car can be expensive and stressful, but planning ahead can save you a lot on a monthly basis. By coming prepared with a sizable down payment and using loan terms to your advantage, it’s possible to buy the car you’ve always wanted without breaking the bank.


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