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Why Should You Avoid Lengthy Auto Loan Terms?

Why Should You Avoid Lengthy Auto Loan Terms?
"""In addition to being dumb for us and the industry, extended term loans are also stupid.

- John Mendel, manager of Honda's U.S. sales

According to Mr. Mendel, competitors are engaging in foolish behaviour, such as offering loans with durations of seven years, in an effort to boost sales. He claimed that automakers are increasing vehicle sales by providing 84-month loans, which lower monthly payments but make it more challenging to pay off the loan sooner. The consumer is stretched so thin, he continued, ""You're ringing the bell on a new-car sale, but that customer is saddled.""

An essential element of the present car financing landscape was brought to light by John Mendel's interview at the 2015 North American International Auto Show. In an effort to boost sales, several vehicle lending businesses are providing longer loan terms. Customers are being drawn in by the emphasis on cheaper monthly payments, but they purposely ignore the deal's high interest rate.

What Do Extended Loan Terms Actually Mean?

You can purchase an expensive car while paying fewer payments thanks to extended loan terms or longer loan terms. But it's crucial to comprehend the truth of such a loan programme before you choose to use it.

The scenario with the upside-down loans

A car loan that is upside down indicates that you owe the lender more money than the vehicle is actually worth. Because you still owe money on the loan even if your automobile is written off in an accident, the situation is extremely risky. It implies that you will be required to pay for a vehicle that you no longer use.

You will have an upside-down car loan if you choose a longer term and lower monthly payments. It's because lenders will utilise your monthly payments to pay down the interest, not the principal.

>> The scenario with the bad equity

The first few years of a car's life have a greater rate of depreciation. Additionally, you will have to make lower instalments if you choose a longer loan period. As a result, the remaining loan debt won't be paid off right away. A condition of negative equity will result. Keep in mind that a car with negative equity makes it more difficult to trade-in since it lacks the ability to lower the cost of the new asset.

>> The condition involving greater interest payments

Using scenario number one, let's say your loan is for $20,000. Your total interest will be $3,744.97 if the interest rate is 5% and the duration is seven years.

Let's move on to Scenario 2, where we'll assume that your loan amount and interest rate are identical to those in Scenario 1. You will end up paying $2,108.12 in interest if the loan period is shortened to four years. Therefore, choosing a shorter term will save you money in the long run.

Now that you are aware of the truth about prolonged loan terms, it is best to avoid them. Always keep in mind that the greater picture is what really important."""
 

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"Why Should You Avoid Lengthy Auto Loan Terms?" was written by Mary under the Finance / Wealth category. It has been read 29 times and generated 0 comments. The article was created on and updated on 13 January 2023.
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