Are shorter car loans a good idea?
Although a short-term car loan may be cheaper than a normal loan, it’s not always a good idea. In fact, manufacturer incentives can often favor longer loans or having a “sweet spot” that is a better deal. Here are a few reasons why a short-term auto loan may (or may not) be a good idea to get the best deal.
If you’re comparing auto loans, chances are your choices will range from 24 to 84 months when financing with a captive lender. If you are paying a high interest rate, you may want to consider the shortest loan possible and finance the least amount of money. However, this is not always the case when buying a car.
For example, Ford currently offers the same 0% APR rate on the Explorer whether you choose a 24 or 60 month loan term. On a $40,000 SUV, a 24 month loan would cost $40,000 at around $1,667/month before taxes and fees. With the 5-year loan, the cost would be the same but the monthly payment would be $667.
Although there is a 72 month option, the interest rate is 1.9%. Here, the payment would be even lower at $588/month, but you’d end up paying around $2,350 in interest. Assuming you have good credit, chances are your priorities will determine which choice is best for you, unless you decide to rent.
In the above scenario, the 60 month loan could be the “sweet spot” if you are looking to avoid paying interest. In other cases, a longer loan might be more affordable than you think. For example, the rate announced by Toyota on the Corolla is 2.49% up to 60 months or 2.99% for 72 months. That’s a very small rate difference.
If your goal isn’t long-term ownership, you may want to consider a lease. This is because lease agreements can make certain car models easier to lease than to buy. For example, the Hyundai Sonata currently offers up to $2,500 in lease rebates, but does not offer any purchase rebates. For some buyers, this might be a better deal.
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