When purchasing a new vehicle, it may be tempting to commit to a loan that is spread over 72, 84, 96 or even up to 108 months. The smaller weekly or monthly payments that come with such long financing periods seem easier to manage than paying larger amounts over a short time. But just what are the disadvantage of these long-term loans?
The first risk of choosing a loan that is spread over a long period of time is the temptation to buy a vehicle that is beyond your means. In fact, these low payments may influence your choice of vehicle. Be aware that the longer it takes to repay a loan, the more interest you will pay over the lifetime of the loan. You also run the risk of becoming underwater, as the vehicle's value will continue to fall, even as you continue to make payments. Your small payments simply cannot keep up with the rate of depreciation, especially when making such small monthly payments. Should you need to replace the vehicle before it is fully paid off, you'll be in a terrible situation and start a continuous cycle of owing more than your vehicle is worth.
The second risk may concern you if you are utilizing 2nd- or 3rd- chance financing. If you need 2nd- or 3rd-chance credit, it means that your credit record is less than ideal. With this type of financing, it is even more crucial that you choose a loan that is spread over a shorter period, ensuring that you'll have options available when you want.
Here is some food for thought to help you make a wise choice when choosing a vehicle and financing it.
First: Are you able to repay the entire loan in 60 months or less? If you can, this would be a smart choice of vehicle. Otherwise, the chosen car may be a little beyond your means.
Second: It is important to study all the details of the transaction. This includes the total cost of the vehicle, plus interest, fees, the price of any accessories you may wish to add, anticipated maintenance costs etc. Once you have taken stock of the full costs associated with your purchase, it is also important to fully understand the commitment you are making before signing the loan agreement.
Finally: To ensure that you are in complete control of your finances, you can ask for payment simulations based on different terms. This way, you will be able to assess how many months you want to extend your loan to make it as beneficial as possible.
In short, taking out a long-term loan may satisfy your short-term goals, but it may come with several drawbacks that you may not be aware of. It is especially important to thoroughly evaluate any factors that may influence the total amount paid for your vehicle, and the length of the loan is one of these factors.
Enjoy complete peace of mind when shopping for your next vehicle by applying these tips, and you'll love your new car even more!
