How Is the Length of a Loan Determined on a Car Loan ?

Buying a car can have a major impact on your personal credit and your monthly budget. Of course, you want to make sure that the monthly payment is something you can afford. But how much are you willing to spend after interest is tacked on? Are you planning to drive the vehicle for a long time, or do you prefer to trade in your car after a few years? These answers all affect the length of your car loan, and, to some extent, you determine it.

You’ll Need Lender Approval

If you elect to finance the car over three, four or five years, you’ll typically have more success in finding a lender willing to finance your purchase than if you want a seven-year loan. To some extent, the length of your car loan is determined by what your lender is willing approve, which is influenced in part by your personal credit. Remember to review your credit report and research competitive interest rates ahead of time to discover what you’re likely to qualify for.

Effect on Your Monthly Payment

If a lender is willing to finance your purchase over a longer period of time, this may have a dramatic effect on your monthly payment. You can use an online calculator to help determine just how much this could impact your monthly auto payment. This can be an attractive option if you know your job is secure, are willing to make payments for a longer period of time, and if you want to drive something nice without busting your monthly budget.

Effect on Your Interest Rate

The longer the length of your car loan, the higher your interest rate is likely to be. According to MSN Money, you could pay up to 2 percentage points more. Additionally, you’ll be paying this higher interest for a longer period of time than if you elected to pay off your car in three or four years. Overall, the luxury of a longer loan will mean that your total investment in the vehicle is considerably more. If you’re concerned with the bottom line, a shorter loan might be for you.

Trade-in Value

The length of your loan can impact your vehicle’s future private resale or trade-in potential. You may not receive as much for it as a trade-in as you would have if you had changed vehicles after five years. If you want to trade in the car after five years, however, and if you still have two years of loan payments to go, your equity in the car may be negligible.

Whether you’re shopping for a new car to replace an old clunker or upgrade something pretty and shiny, it’s important to determine the best loan option for you based on research and your specific situation. If you’re not willing to hold onto the vehicle for the full term of the loan, a long-term loan might not be right for you.

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