Used cars are ideal because they’re highly affordable and suitable for people planning to own a car for the first time. In fact, you can get a variety of premium brands as well as economical subcompact cars to suit various needs. For most first time buyers, the burning question is: How many years can you finance a used car?
Today, we’ll look at repayment periods and whether you really need a long one for your monthly car payments
1. How many months can a used car loan be?
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Since 2015, more and more lenders have increased repayment periods for used car credit financing. Three years ago, a lender would offer you a maximum repayment period of 72 months. The rising demand for cars nationally has made credit lenders offer more affordable car payments by offering longer repayment periods. Nowadays, it’s easy to get 84 months on a used car loan.
2. Why are long-term car loans popular?
1. Makes high-end cars more affordable
Very few buyers can walk inside a dealership and pay cash for the latest BMW or Mercedes saloon or SUV. Even if it’s used, the price tag is still beyond the reach of individuals earning less than $10,000 monthly. On the other hand, car dealerships cannot limit themselves to cash buyers and that’s why they offer good credit terms for buyers interested in getting an auto loan for a used premium car.
In this situation, a 72 or 84-month repayment period will really lower the car monthly payment. If you already have half of the car’s price in your bank account, you’ll own your dream car thanks to choosing a longer repayment plan.
2. Most people don’t want to spend more than $500 a month
Did you know that the average car monthly payment is approximately $530?
Car research experts have observed for more than a decade that the average buyer doesn’t want to spend more than $500 a month on auto loan installments. There are two ways of achieving this. First, you can buy a really affordable car that doesn’t cost more than $25,000. The second option is choosing the longest repayment period available.
Let’s assume that you want to buy a used 2017 Toyota SUV worth $25,000. The dealer’s interest rate is 8%, which entices you to pay $8,000 for down payment. Now, your auto loan principal is $17,000. If you choose a 72-month repayment plan, your credit lender will expect $299 monthly.
3. Buyers with bad credit want affordable car payments
What is a bad credit auto loan? It’s financing made available to car buyers with subprime credit scores. The interest rates are usually double those offered to car buyers with excellent and good credit ratings. Why? Because the creditors are aware of the high risk of default.
Another type of bad credit financing is buy-here-pay-here that’s offered by car dealerships. However, this tends to be more expensive than bad credit auto loans because car dealerships don’t do credit checks. Plus, they have the freedom to set their own interest rates.
A car buyer with bad credit ratings will go for the longest repayment period due to one reason. Doing this enables them to lower their car monthly payments by a huge margin. If you got a bad credit auto loan worth $15,000 at an interest rate of 12% and a repayment period of 48 months, how much will your monthly payments be? If you don’t apply for extra services, your car monthly payment amounts to $396.
What happens when you choose a 72-month repayment period? your monthly installment reduces to $294.
3. What are the disadvantages of choosing the longest repayment period?
1. You pay a lot of interest
The amount of interest you pay depends on the number of installments in your repayment plan. Each car monthly payment constitutes interest charges. What happens when you extend your repayment period? The credit lender spreads the costs over more months and this directly lowers a customer’s payments.
If you received a car loan worth $15,000 at an interest rate of 12% and a repayment period of 48 months, your total interest amounts to $4,008. We’ve arrived at this answer by deducting the principal ($15,000) from the total interest and principal after 48 months ($19,008). When you choose a 72-month period and other factors remain constant, your total interest charges amount to $6,168.
2. Increases your chances of skipping payments
Did you know that the more time you spend repaying a loan, the higher your chances are of skipping payments?
A lot can happen during a 72 or 84-month repayment period. You may lose your job two years after getting your auto loan and fall behind on car payments due to the loss of income. Perhaps the government can drive down your business by passing a new set of unfavorable laws targeting your industry. All these events directly affect a buyer’s ability to make car monthly payments consistently.
3. You cannot get a good resale value
If you’re planning to sell your car and buy another one, you won’t get a good deal. Why? Due to the high-interest costs paid during your very long repayment plan. Let’s revisit our previous example on the $15,000 car loan. In order to get this financing, you need a down payment of $8,000 so that means that your car costs $23,000.
After choosing a repayment period of 72 months, your total payments add up to $21,168. However, you can’t sell your used car at $21,000 since it depreciates annually. By the time you pay the last installment, your car’s value drops by at least $7,000. That’s bad news because you can’t sell your car for more than $16,000.
4. High possibility of servicing an upside-down loan
An upside down auto loan exists when the amount of credit financing exceeds the value of a car. This happens when enters into a high-interest car financing deal due to a high rate of depreciation. It also happens when the buyer gets into a severe accident and the car loses 40-50% of its value.
Let’s assume that you have a bad credit score of 550. You manage to find a lender willing to offer you an auto loan worth $15,000 for a car valued at $23,000. However, the interest rate is 16%. After two years, depreciation lowers your car value from $23,000 to $15,874. However, since you signed up for a 72-month repayment period, you’ll still have to pay interest charges for the next four years.
4. How to pay off your car loan early
1. Pay at least 50% as down payment
The higher your down payment, the lower your principal. Doing this has a direct effect on your car monthly payments because you pay less interest at the end of your loan. It also prevents your car loan from turning upside down by reducing the amount of credit.
It’s advisable to save for at least three consecutive months. If you belong to a credit union, you can also borrow a loan to boost your down payment.
2. Avoid skipping payments
Some car dealerships allow customers to skip one or two payments. The credit lender might spread the outstanding balance on subsequent installments together with late payment fines. However, this option provides temporary relief. Why? Because the more missed payments you accumulate, the harder it is to make your future car payments.
If you foresee financial challenges ahead, it’s wise to approach your credit lender in good time. Persuade them to allow you to pay half your monthly installments until your cash flow improves.
3. Use a car loan calculator before signing the auto loan agreement
A car loan calculator helps buyers determine their monthly payments. The good news is that it’s free and easily accessible online. In fact, you can even calculate monthly payments using your smartphone from your home or office.
A car loan calculator will help you figure out how much down payment you need in order to get out of the car loan in 48 months or less. You’ll also see how long it will take to repay your credit based on the monthly figure suggested by the car sales rep.
4. Avoid car loans with high interest
High-interest rates force some car buyers into signing up for long repayment plans to get affordable car payments. However, this provides temporary financial relief because you’ll realize that you actually pay more interest. Plus, there’s a high probability of skipping payments.
The best option is getting a personal financial coach to help you improve your credit score. It might take a full year but the benefits will last for a long time. If you’re not in urgent need of a car, then you don’t need a bad credit auto loan or car dealership financing.
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5. Save up for lump sum payments
If you still have a large portion of your disposable income left after making a car payment, consider saving lump sums. You can open a fixed account and save consistently for five months. Then, you’ll use these savings to pay your future monthly installments.
Why is this a smart move? Because it keeps you ahead of schedule to your advantage. If you only had 10 installments left and your savings cover four, you’ll be in a better position to make another lump sum payment.
6. Sell unnecessary items
Do you have electronics or furniture in good condition but occupying space in your home garage unnecessarily? If yes, you can convert them into quick cash and pay off a couple of payments in advance. All you need to do is take some very clear close-up photos and upload them on your social media accounts.
7. Increase your monthly income
One way of getting out of a loan fast is by paying higher monthly payments. Doing this reduces the number of installments you pay as well as interest. Now is the best time to look for an extra job or start a business. The extra income will enable you to afford higher installments easily.
5. How to get out of a car loan fast
1. Sell the car
You can sell a car with an outstanding auto loan balance as long as you gain the credit lender’s approval. This option is suitable if you no longer like the car and don’t want to clear your outstanding balance using your own money. It’s also important to notify potential buyers about your outstanding balance in advance so that they’re prepared to wait a little longer to receive the car title.
2. Borrow a low-interest loan to clear your outstanding balance
If you have good or excellent credit ratings, then you can get out of your car loan by borrowing from a credit union. Why? Because the interest rates are quite low compared to commercial banks plus you enjoy friendly repayment terms. If you owe less than $10,000, you can settle this balance fast by getting a credit union loan.
3. Consider a voluntary surrender
This falls in the list of last resort measures. Why? Because it directly affects your credit score. It might take more than a couple of years to redeem it. Plus, a voluntary surrender remains in your credit history for at least five years.
6. Make a smart decision
In order to get affordable car payments without risking getting into an underwater auto loan, make sure you budget for a vehicle that you can actually afford. Why? Because the car’s price determines your auto loan principle. Plus, it determines how much down payment you need to get the average car monthly payment.
Choosing short repayment periods is wise because it reduces your likelihood of skipping payments. This is ideal for self-employed buyers since doing this enables you to pay a huge portion of your outstanding balance. Why is this important? Because you never know how long it will take to get another contract to boost your cash flow.
Always remember to use the online car loan calculator.