Understand the Pros and Cons of Auto loan Terms

You’ve found the car you want and have identified the source for your auto loan. The next and equally important decision is how long you want to take to pay it back. While your budget will play a significant role in your decision, it is prudent to consider the long term implications or repercussions the different repayment plans will have in your financial life. Both short term and long term loans have their pro and cons, so carefully balance them out and see which you favor.

Most of people will be tempted to choose a long term loan because the repayment plan allows more ‘breathing room’, wrongly believing that smaller payments will be friendlier to their bank accounts. However, do the math-in the end one ends up paying a lot more money for the car by spreading out the auto loan, over 4 years as compared to 2 years. The accrued and paid interest catapults the cost of the car way beyond its original price. So before you sign up, decide whether it’s worth paying thousands more for that car. In addition, the value of the vehicle will depreciate over the years meaning the trade-in value significantly dwindles. By the time you finish paying for the car, its resale value will be shockingly low.

Long term loans hardly seem wise but they do offer some appeal especially for those with other financial obligations that permit them to make only small monthly payments. Further, should one loss a source of income, they may still be able to scrape up monthly payments.

A short term auto loan on the other hand, is one that has payment plans of between one to three years. They require a higher monthly payment but at significantly lower interest rates. This means that in a far shorter period of time, a person will have cleared their debt. It also means that one pays a lot less for the car and that the car will likely have a good trade-in value. Individuals with bad credit are sometimes obligated to take this type of loans in order to re establish their credit history. But buyers who have a good credit also opt for it because of its obvious benefits. The only down side is the sizable monthly payments that can prove problematic should one experience an interruption to their income flow and the general sacrifices one has to make in order to met them.

Remember the various payment options for an auto loan and their advantages and disadvantages, and then weigh in your financial situation and make the best choice. But keep in mind; the sooner you pay it back the better for you.

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