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The Risk of Car Loans With Long Terms

Car loans are available for several different loan terms. Meaning, you can take out a car loan for 24, 36, 48, 60 or even 72 months. The longer the loan term, the lower your monthly payments are going to be. Utilizing a car loan of 5 years or more will allow you to purchase a more expensive car. You may even be able to buy a new car. However, you will wind up paying more in interest over the life of the loan than if you were to apply for a shorter term loan. Despite this information, the numbers of individuals that opt for longer auto loans rises each year.

Why are lenders issuing five and six year loans?
New cars are better manufactured than they were in the past. Thus, increasing the average life of automobiles, resulting in a decrease in the risk in lending. As a result, lenders are more willing than ever to increase available loan terms for new car purchases.

However, as mentioned, you will wind up paying more in interest with a financing term that is longer than shorter. You will also wind up paying more for maintenance on your car, i.e. tune-ups, brakes, tires, etc..

Dealers like buyers to take out shorter car loans. Why?
It is likely that the car dealer you are purchasing a car from will try and get you to commit to a two or three year auto loan program. A shorter term will mean that your cash will be freed up quicker, resulting in you going back to the dealership to buy a new car sooner than if you took out a longer car loan. 

What can I expect the difference in monthly payments to be with a 3, 4, 5, or 6 year loan?
It would be a good idea to crunch some numbers in our auto loan calculator to get a solid grasp as to what you can expect to pay with the different loan terms. The average car loan applicant borrows around $20,000. So a three year loan at 7% would be $618, four years $479, five years $396 and six years $341. As you can see, there is a pretty big swing in monthly costs as you decrease the loan term. But the longer the loan, the more interest you are going to pay.

Selling or trading in a used car after a five or six year loan.
Cars depreciate in value every year.  After a six year loan, a car will be valued at about 25% of its new car price. A five year loan will result in your automobile being worth approximately 35%. You will get very little return for your investment when the time comes to sell or trade-in your vehicle.

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