Reasons to keep your loan terms short


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If you know anything about auto financing, know that the longer the term of your loan, the more money you will end up paying. The numbers can be misleading because the longer you extend a loan, the lower your monthly payments. A low monthly payment might sound good, but it’s not always the best option, especially if you have bad credit.

Opt for a lower overall cost

What you need to know about auto loans is that interest is added to the loan balance every day. So the longer it takes to repay the loan, the more interest you will pay. This can be especially costly if you are a bad credit car buyer, as subprime auto loans carry higher interest rates. The higher your interest rate, the higher your interest costs will be.

Since it’s difficult to qualify for lower interest rates when your credit is low, you need to find other ways to keep your interest costs low. The easiest way to do this is to pay the highest monthly payment you can afford for the shortest amount of time possible.

Let’s break this down by the numbers so it’s easy to see the savings:

  • Example A: A loan of $ 20,000, at 10% interest, for 72 months, with $ 1,000 down payment, will cost you approximately $ 26,400 at the end of your loan term. In this example, you are paying $ 352 per month for six years. At the end of your loan, you paid a total of $ 6,343 in interest charges.
  • Example B: The same loan for a shorter term, say 48 months, will save you over $ 2,000 in interest charges. In this example, your monthly payments are higher, almost $ 482 per month, but you only pay for four years. This reduces your interest charge to approximately $ 4,130 and the total payments to $ 23,130.

Keep in mind that taxes and property and license fees are not included in the price of the loan, so you will need to be prepared to pay these fees up front. Plus, making a larger down payment will further reduce the overall cost of your loan.

Other ways to save

In the examples above, we chose $ 1,000 down payment because subprime lenders generally require a minimum down payment of that amount, or 10 percent of the vehicle’s selling price, whichever is less. It is often recommended, if you can, to pay 20% to help offset costs and depreciation. The larger the down payment, the less you need to borrow, which in turn lowers interest charges over the life of the loan.

With Example B above, if you were to use a down payment of $ 4,000 (20%), you could save an additional $ 652 in interest charges over the life of the 48-month loan.

Why Shorter Loan Terms Are Important For Bad Credit

Not only you save money by keeping the loan term short, but you’ll have a better chance of terminating your loan before something goes wrong or your car loses too much value. The most common loan term is 60 months, or five years. A lot can happen in five years, including mechanical failure or personal injury. The risks of these types of problems increase as the vehicle ages. Therefore, extending a loan to 72, 84, or even 96 months could require you to pay for a vehicle that can no longer be used.

Another reason to go short is that paying off a car loan is a great way to improve your credit, as is making all of your monthly payments on time and in full. Your credit should improve after the loan is over, which happens faster with a shorter term loan. This allows you to search for a loan with better rates sooner.

Start your loan process today!

When it comes to getting a loan with bad credit, you will need a lender who can work with difficult credit situations, and not everyone can. Those who only work indirectly through special finance dealers, and not all dealerships advertise whether or not they have these lenders. This can make it difficult to know where to turn when you’re having trouble getting a car loan.

Here has Auto Express Credit, we know how difficult it can be to go from dealership to dealership to be disappointed. That’s why we’ve taken the stress out of the search by working with a nationwide network of Specialized Finance Brokers who have the lending resources you need. Let us help you find a local dealer. Simply fill out our form without obligation and at no cost online auto loan application form and to start the process today!

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