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The truth about longer car loan terms: Shorter is better

Blog Post by outsidesonia - 02/06/2018 09:56:51pm

The Point: Borrow for as short a term as you can afford. Longer auto loan terms can cost you thousands. That’s great for car companies, banks, and the auto dealer, but maybe not as good for you.

Caution: Auto loan terms are getting longer

Over the last 10 years, the average auto loan term has increased from 60 to almost 70 months. This allows the borrower to make smaller monthly payments on the same loan amount. So what’s the catch?

Definition: A Loan Term

A loan term is the period of time over which you repay your loan, usually stated in months.

Longer terms are better for car makers and banks

Longer loan terms are good for car makers. People buy more cars if they can pay less per month to own them. Banks earn more money because borrowers pay interest for longer.

Dealers can earn 3-5x more if you take a longer term!

For the work the dealer does arranging your loan, the lender pays the dealer a commission. That’s fair.

What doesn’t make sense is that a dealer can earn 5x more commission if you take a 75 month loan compared to a 55 month loan. That means that the dealer has a strong incentive to push you toward a longer loan term from the bank that pays the biggest commission.

An example: Save up to $3,450 with a shorter loan term

But what’s good for you? The table below shows why it’s so tempting to borrow for longer, and the problem it causes.

Loan Amount $32,000 $32,000 $32,000
Loan Term in Months 60 72 84
Interest Rate 6.00% 6.50% 7.00%
Monthly Payment $619 $538 $479

The same $32,000 loan can cost you an added $3,450 in interest when your loan term goes from 60 to 84 months. This is for two reasons: your interest rate is likely higher with a longer loan term, and you pay interest over a longer period.

Here’s the trick!

What’s so tempting about that? Your monthly payment can go down by $100 per month. But over the life of the loan, you’re paying much more.

You’ll hear the one question we dislike most: what would you like to pay per month?

Watch out for this question

How will you know if your dealer is trying to steer you to a longer loan term? You’ll hear the question we dislike most: what would you like to pay per month? That’s the wrong way to start your loan process.

A better car loan

When comparing your options, remember that the interest rate on the loan is the price you pay to borrow money. And the best loan is the one that costs the least. We understand that a low monthly payment is important. That’s why you need to shop around to find the right loan for you and your budget.

It’s better ‘Outside’

Outside Financial can help you avoid the games, understand your options, and arrange the loan package that’s right for you before you go to the dealership. And if you didn’t get your loan ahead of time, we can help you find a new lender to refinance. It’s better Outside.

Other Resources (from our FAQ section)

Other Resources (from our Learn section)