|By David Pilley on November 21, 2011
A car may be one of the most prized possessions you will ever have. It helps in your everyday life, getting you to work, back home, and everywhere in between. Having your own car can also give you a sense of pride, knowing that you are independent enough to get around on your own. You may also take pride in the type of car you have, washing it on a regular basis and maybe even giving it a name. Other than your home or apartment, however, a car will most likely be the most expensive transaction you will ever make. You’re most likely not going to be able to pay for it in full, so you’ll be looking at a secured car loan. The reasons you will want to get a short-term loan instead of a long-term car loan include potential interest payments and ultimate performance failure of the vehicle.
Here’s some math to look at, thanks to an article I found at cars.com. With short-term loans, you’ll be making higher monthly payments; however, long-term loans mean you’ll be paying much more in interest. So, a $22,000 loan with a 5 percent interest rate over three years (36 months) will be about a $659 monthly payment, while this same loan over six years (72 months) will make the monthly payment nearly half, around $354. However, at the end of a three-year repayment plan, you will have paid about $23,737. At the end of a six-year plan, you will have paid about $25,510. With a six-year plan, you will pay about twice as much interest as a three-year plan.
Be careful about lower monthly payments, as it typically means you’ll be paying more in the long run.
Here’s the other pressing issue: your car is not permanent. It is a machine, and like all machines, it eventually succumbs to wear and tear. A 2006 study from R.L. Polk & Co. found that the average life span of a car was 9.4 years. A recent study from the US Department of Transportation found the number to be about 12 years. Remember that the loan is just one of many payments you’ll be making on your car. Of course, you’ll be paying to refuel the gas tank almost every day, but eventually something is going to break. You may get a cracked windshield, you may break or lose one of your side mirrors, or one of your headlights or taillights may burn out. Your brakes may freeze up, your transmission may get shot, your tires may get flat, your engine may overheat. Make sure you do research on car brands before getting a loan.
A simple monthly payment is just one aspect of a car loan. Ultimately, a short-term loan with a higher monthly payment may end up costing less than a long-term loan with a higher interest rate. A good credit score and a sizable down payment may also help when it comes to getting a loan for a car. Just remember to take good care of your car before its ultimate death.