Cars have become a fairly integral part of modern life, people need cars for work or family commitments. Cars however, are one the costliest things we buy as they depreciate in value and need regular, expensive maintenance. The best way to buy a car is with your own savings, however this isn’t always possible. If you absolutely need a car but don’t have the money for it, it will mean getting a loan. If you want to save money on your car loan you should make it as short as you can possibly afford. Don’t be fooled by a smaller monthly repayment on a longer loan, you will pay heaps more over the entire length of the loan.
The great depreciating asset
Cars depreciate like crazy. The old saying that a new car loses half of its value as soon as it drives out of the dealership is probably half true. Either way if you buy a car using a loan you will be in a position of negative equity, where the value of the asset (car) is less than the amount you owe on it.
This is not a good thing because people’s love for their new car generally doesn’t last as long as their car loan repayment calculator. In this instance, if the car is sold before it is paid off, you will most likely have to put up extra money to cover the debt amount. By having a short loan period, limit the amount of amount of time the car can depreciate while you have the loan.
Cost of a loan
There are two main costs to consider; fees and interest repayments. Fees are generally upfront as well as per month, so the longer the loan period the more monthly fees you will pay. The interest is payable while ever you have the loan, so obviously a shorter period is better. For a $20,000 loan with 10% interest you will pay $2150 in interest over two years, but $5500 in interest over five years.
The quicker you can pay off your loan the less interest and fees you will pay. Set your repayments as high as you can afford, which will mean the loan length will be as short as possible. Although, you might have to get a minimum term of two years to avoid additional set up costs, and watch out for early repayment fees or ‘prepayment’ fees when sign up.
Before you sign up, or even go looking for a car, shop around for your loan. Consider the lowest interest rate and fees. If you’re want to save money on your car loan you should make it short.