Be Smart About Used Car Loans
As COVID-19 lockdowns were lifted this year, demand for cars has soared, so have car prices and car loans. According to Experian, auto loan debt climbed to an all-time high of $1.35 trillion in 2020 and more car buyers are taking longer term loans for 73 and 84 months or six to seven years.
Used car shoppers who opted for loans with terms of 73 to 84 months increased to 20.6 percent in Q2 2020, from 18.7 percent for the same period in 2019, while the percentage of used car loans with terms from 49 to 60 months fell to 21.2 percent in Q2 2020, from 22.6 percent in 2019.
Longer term loans may offer manageable monthly payments but can end up costing buyers more in total interest than more traditional 48-month or 60-month auto loans.
- If you bought a 3-year-old car and took out an 84-month loan, it would be 10 years old when the loan was finally paid off.
- Stretching out your loan over a long period of time means you will be paying more in interest in the long run.
- You could find yourself upside down on your loan if you are paying it off more slowly than your car's value is depreciating.
- If you decide to trade-in your car for a newer model before your pay off your long-term month loan, even after receiving trade-in value for your car, you will still have to pay off your loan balance, which a dealer would likely roll into a new loan that will only increase your debt.
- When you buy a used car with that long loan cycle, you should also expect car repair bills for new ties, new brakes during that period on top of your loan payments.
While it is smart to go with a shorter loan term, if you feel more comfortable with a longer loan term with a smaller monthly payment than what you actually can afford, you can try to pay off your loan early by making extra payments. This will shorten your loan and in the long run save you money on the interest. Just make sure the loan does not have a pre-payment penalty.
Regardless of what loan term you select, the best way to know what loan would be best for you is to first get preapproved for a car loan. This will give you a budget to work with so you know exactly how much you can spend.
If you are preapproved, you will get an offer of credit including the loan size, terms and interest rate from a lender. To be sure you receive the best terms, get preapproved by more than one lender. A preapproval from a lender will give you more bargaining power at a dealership.
When in the market for a used car, stop by Carousel Preowned. CarouselPreowned serving Iowa City, Cedar Rapids, Davenport, North Liberty, Marion, and Coralville, IA, is proud to be an automotive leader in our community. We do our best to ensure your complete satisfaction every time you step into our car dealership. This is why we offer the widest selection of used and pre-owned cars, trucks, and SUVs and provide true ease of purchase in Iowa.