Types of Auto Loans
There are two main types of auto loans. They are long-term and short-term.
Usually you will have a long-term loan for your newer cars and these loans last for a period of 36, 48, 60 or even 72 months. Short-term loans are used for older vehicles and last between 24 or 36 months.
Long Term Loans:
- Smaller monthly payment
- Loan will cost more over the life of the loan
A three-year $15,000 loan that is lengthened to four years will decrease your monthly payment from $450 to $377. However, your interest rate will increase from 5 percent to 9.5 percent. The total amount you pay over the life of the loan would increase from $16,200 to $18,096.
One potential pitfall of a long-term loan is that the car's value can drop below the amount that is owed...especially if the vehicle is destroyed or stolen during the first year or two.
Short Term Loans:
- Higher monthly payments
- Charged less interest
- Pay less overall
Next -- Should I Buy or Lease?
