If you’re like 4 out of 10 new car loan holders, you just might own your loan longer than your vehicle. The Consumer Financial Protection Bureau just put out a report showing 42% of new car loans in the past year carried a loan term of 6 years or more. Notice the “or more,” which can mean seven or more years.
Here’re 4 things you need to know about the length of your next or current car loan:
How long do you typically own a car for?
While national averages are helpful, your personal average is what is going to affect your finances. Do you tend to keep your cars for 3 years, 5 years or 7 years? Longer? Keep this number in mind to see if you’ll owe a balance on a new car loan when you trade in your car. For instance, let’s say you keep your cars for an average of 5 years, and you take out a $20,000 vehicle loan. Having a loan that is 6 years or longer would keep you in debt when you trade in your car. (See also: How to Get a Car Loan)
Are you getting a longer termed loan because you want more car?
This is often the case. After all, the average loan amount was $25,300 for six-year loans and $32,200 for seven-year loans for the last year according to the CFPB.
But you can get a vehicle for $20,000 that you could pay off in 5 years without a higher payment. Really think about what your needs are and your budget before stepping foot on the lot. Also, remember trade in value of your previous vehicle is a negotiating tactic. Call ahead to ask questions about how much your old car might be worth before you drive it over.
Could you refinance for a lower rate?
Your credit may not have been great when you purchased your vehicle. Thus, your interest rate might be much higher than what you would currently qualify for. Cutting your interest from 10% to 3% on a $20,000 loan with 5 years left would save you $65 per month. You could then use the $65 you saved to pay off your loan months faster.
Sometimes you take out a longer car loan because you could only qualify for a high interest rate and the monthly payments would be too high on a shorter-term loan. Your alternative was to not have a vehicle at all. But if your interest can be reduced now, you could save months of your payment amount and keep your payments low. If you are unsure about what your current credit looks like, pull your credit reports from all three bureaus. (See also: Check Your Experian Credit Report for Free Now)
Make sure you dispute any errors and pay all your credit card and loan accounts on time for at least 3 months with an effort to reduce card balances. Then compare loan interest rate offers from your bank, credit union and other sources. Remember, there isn’t a fee for refinancing a car loan.
Do you need to buy a car now?
Every financial decision involves an opportunity cost for what else you could be spending your money on. If your current vehicle is working well, you may want to wait. However, if you have upcoming repairs or scheduled maintenance that could get pricey, this might be a great time to trade in your car. Take a moment to add up your expected maintenance expenses so you can compare this amount to the cost of new vehicle purchase.
Buying and financing a new car loan can be a complicated and expensive process. But with a little credit and budgeting elbow grease, you’ll save money and maybe get a nicer car. For more tips, check out the Consumer Financial Protection Bureau’s auto loan shopping sheet.