When buying a new car, one of the biggest decisions you have to make is how long to take a loan out for.
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For a lot of people, the decision comes down to the monthly payment. Some people prefer to have lower monthly payments and extend the loan for a longer amount of time. Others might want to pay the car off more quickly, so they prefer to pay a larger monthly payment for a shorter amount of time.
However, looking at only the amount of the monthly payment can cause car buyers to forget about the total cost of the car and how long it will take them to pay off the total cost of the loan.
According to Edmunds.com, the average length of a car loan is 5.5 years. Some are even extending the loan to six or seven years.
When deciding on the length of the loan, the following factors should be considered:
Interest: The longer you extend your car loan, the more money in interest you will have to pay. Edmunds.com recommends not extending your loan for longer than five years.
Equity: The longer the car loan, the longer it will take you to build equity on the car. If you need to sell your car before your loan is paid off, you could end up losing money on the car and owing a balance on the vehicle. Also, according to Edmunds.com, if you get into an accident in the car before it’s paid off, the insurance company will only pay you what the car is worth, not the total owed on the car.
Resale Value: If you take out a long loan and want to sell your car after paying it off, you might not be able to ask for the amount of money you think your car is worth. The longer it takes you to pay off the car, the older the vehicle will be when you try to sell it. The older the car, the less valuable it is on the market, and the more it has depreciated.