Most car shoppers need to take out an auto loan to finance their new car purchase. In addition, most buyers want their monthly payments to be as low as possible. However, one important factor to consider when choosing your loan is the term, or how long you have to pay it back.
The typical new car loan term is usually 60 months, which means, you’ll have five years to pay back the loan. In general, the longer the term, the lower your monthly payment will be. But, long-term loans usually come with higher interest rates, which can cost you a lot more in the long run.
With a shorter term, monthly payments will go up, but, the potential savings from interest can be fairly significant.
For example, if you purchase a new car that costs $28,000 and secure a loan with a 36-month term and get an excellent 3% interest rate, your monthly payment would be $810. While that is a good bit of money, the total amount paid over the life of the loan would only be $29,160.
On the other hand, with the same $28,000 vehicle and a 72-month loan with a 6% interest rate, the monthly payment drops to $464. But, at the end of the six years, the buyer will have paid a total of $33,408—over $4,000 more than the short-term loan.
In the end, try to find the ideal balance between interest rate, monthly payment, and loan term that fits your budget.