Example #1
Assume you purchase a car for $25,000 at 3% APR. Here’s a look at how the term you choose can affect the amount you pay for your new vehicle:


36 Month $727.03 $1,173.09
48 Month $727.03 $1,561.19
60 Month $449.22 $1,953.04

As you can see, a shorter-term loan will lead to a higher monthly payment. However, you will also pay the least amount of interest overall with a shorter term. A longer monthly term will result in lower monthly payments, but you’ll pay much more in interest over the life of your loan.
In this example, the 36-month term’s monthly payment is $277.81 higher than the 60-month term. However, you also pay $779.95 less in interest over the loan’s lifetime.  
The effect of loan terms comes into play even more so when buying more expensive cars and considering even longer loan terms, as we’ll review in Example #2.

Example #2
Assume you were to purchase a car for $50,000 at 3% APR while considering loan terms ranging from 60 to 84-months:

60 Month $898.43 $3,906.07
72 Month $759.68 $4,697.23
84 Month $660.67 $5,495.86

In this example, the 60-month term’s monthly payment is $237.76 more each month than the 84-month term. However, you will save $1,589.79 in interest over the life of your loan with the shorter term. Not to mention, with a longer-term, you have a higher chance of negative equity, which means you would owe more on the car than it's actually worth at some point.

Avoiding Long-Term Loans
One of the first questions dealerships will ask is, “What is your monthly budget?” This is because dealerships know if they can keep the payment within your budget, they can likely sell you a more expensive vehicle. The easiest way to do this is by extending monthly payments. 
Your best bet is to aim to finance a car within the 48 to 60-month range. If you can't afford the payments each month, chances are the car you're looking to buy is out of your price range. Keep in mind, cars quickly depreciate, so the longer your loan term, the less trade-in value and equity you'll have when it comes time to purchase another vehicle.

We’re Here to Help!
While purchasing a new vehicle is exciting, it’s also a decision that can impact your financial standing for years. Our goal is to help you make the best decision for your unique financial situation. Our team is here to answer questions, run numbers with you, and help you avoid dealership pricing games. 

And to make the search for your new car stress-free, we just launched our new partnership with AutoSmart. Let our search engine do the work for you: https://eaglecu.cudlautosmart.com/ 

Please stop by any branch location or give us a call at (949) 588-9400 to learn more about our vehicle loan options and become pre-approved. 

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.