If you’re in the market for a new car, you may be considering taking out a long-term car loan. This can be tempting, especially if you don’t have the cash on hand to buy a car outright. Successful car financing depends on how well you manage your money and make smart choices about using credit. However, there are several reasons why long-term car loans aren’t a good idea. This blog post will discuss some of the risks involved in taking out a long-term car loan.
You’ll Pay More Interest
The first reason long-term car loans aren’t a good idea is that you’ll pay more interest. This may seem like a no-brainer, but it’s important to consider. When you take out a loan, you’re essentially borrowing money from the lender and agreeing to pay that money back plus interest. The longer the loan term, the more interest you will pay. This is because the lender will charge you interest on the loan’s remaining balance, which will be higher if you have a longer loan term.
For example, let’s say you want to purchase a $20,000 car and qualify for a five-year loan with an annual percentage rate (APR) of 12%. If you take out a five-year loan, you’ll pay $22,176 in total over the life of the loan. This includes $20,000 for the cost of the car and $2496 in interest.
You Could Owe More Than Your Car Is Worth
Another reason why long-term car loans aren’t a good idea is because you could end up owing more than your car is worth. This is because most cars depreciate over time. It’s not uncommon for a new car to lose 20% of its value in the first year alone. If you take out a five-year loan on a $20,000 car, the car could be worth as little as $16,000 by the time you finish paying off the loan. This is important because if you have to sell or trade in your car before the loan is paid off, you may not have enough money to pay off the remaining balance.
You Might Have Trouble Making Loan Payments
If you’re considering a long-term car loan, one of the first things you should think about is whether or not you’ll be able to make the monthly payments. If your financial situation changes and you can no longer afford the payments, you could default on the loan and lose your car. In conclusion, long-term car loans aren’t a good idea for several reasons. You’ll pay more interest and you could end up owing more than your car is worth. If you’re considering a long-term car loan, be sure to weigh the risks involved before deciding.