Buying A New Car? Keep Your Car Loan Short And Sweet

New cars are getting more expensive. Hard to believe, but the average sales price on a new car today is more than $37,000.

That is tempting some consumers to stretch out car loans to make their monthly payments more affordable.

But car experts advise against long-term car loans.

“Although stretching the length of a car loan will lower your monthly payment, it’s nearly always better to keep your loan term shortabsolutely no longer than five years, or 60 months, for a new car,” says Warren Clarke, consumer advocate and car expert, in an article for AARP.

What loan terms are available? A typical car loan might run from 3 years (36 months) to 6 years (72 months).

Why are shorter loans better? Just like with a home mortgage, the shorter the term, the lower the overall interest bill from start to finish.

Here’s a comparison: For example, Bank of America compares the cost of a 4-year car loan with a 6-year car loan, both for $25,000  and at 4% interest. The 4-year loan costs $564 per month while the 6-year loan drops the monthly payment to $391. Seems more affordable, right? Unfortunately, the 6-year loan will cost you $1,066 more over the life of the loan since the interest payments are dragged out over time.

Clarke has some final advice for consumers in the market for a new car.

“If you can’t swing the monthly payment on a four or five-year loan for the car you like, it probably makes sense for you to switch your focus and start shopping for a lower-priced vehicle, he says.

Financial Tip: Want to keep your borrowing costs as low as possible? Check your credit score periodically to make sure it’s accurate and reflects your good payment history. Keeping a tip-top credit score will lower your loan and insurance costs. For tips on improving your credit score, visit the myFICO website.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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