According to data from Experian Automotive, the average term for a new car loan in the third quarter of 2013 was 65 months. However, terms longer than 5 years are available from some dealers. Longer loan terms might mean lower monthly payments, but it could also mean higher cost overall. Before jumping into a financing agreement, know your options so you can pick the term that’s best for you.

Lower Payment, Higher Interest

If you financed $15,000 on your car for a term of five years (60 months) at 4 percent interest, you’d pay about $1,575 in interest over the term of the loan, or $16,575 total. Expand that to 97 months, and you’d pay about $1,000 more in interest over the life of the loan, for a total cost of $17,580 for the same car. Factor in the fact that interest rates are usually higher for longer terms; adding just 0.2 percent to your rate for 97 months will almost $140 to your total interest expense.

Risk of Depreciation

You’ve probably heard that your car depreciates the moment you drive it off the lot. That’s why many auto experts advise against getting a loan term for longer than you plan to keep the car. Edmunds, a leader in the auto industry, explains how not all cars lose their value at the same rate and if you plan to drive the car for a long time, you might not need to worry about depreciation. If you like to trade cars every five years or rack up a lot of miles, getting a 97-month loan will likely leave you owing more than your car is worth.

Affordable Wheels

Unless you live and work in a major metropolis, finding or keeping your job often makes car ownership a necessity rather than a luxury. Sometimes you have to put your total payment considerations aside and take the loan term that makes your monthly payments affordable. Holding a steady job and making payments on time may provide greater financial benefit in the long run than saving on interest.

Do Your Homework

Before you set foot in a dealership, work out a budget and determine the monthly car payments you can afford. Then do some research to narrow down a make and model, and if your budget is tight, base your choice on your needs rather than wants. It’s one thing to take a longer-term loan because that’s all you can afford; it’s another to take a longer-term loan and pay extra interest so you can add unnecessary bells and whistles to your vehicle. As part of your car purchase preparation, it might be a good idea to order your credit report and score. A good score may indicate you may be offered better rates or qualify you for dealer incentives like 0-percent financing.

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About the Author
Nannette Croce is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc.  © 2013 ConsumerInfo.com, Inc.  All rights reserved.