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What are Common Car Loan Terms?

August 5, 2021 by Space Coast Credit Union

Do you feel like your brain’s dissolving into Jell-O as you’re exploring car loan repayment periods? It can feel overwhelming as you’re weighing the pros and cons between short-term and long-term loans. Common car loan terms usually range between 24 and 84 months—with the average length hovering around 72 months. But just because a longer car loan term may work for some people doesn’t necessarily mean it’s the best option for you. 

If you feel your excitement quickly fading into confusion as you’re researching your options, don’t worry, we’re here to help. And hey, we get that cars aren’t small potatoes. They’re a staple of the American life allowing us to work further away from home and take family road trips. Knowing which terms will work best for you can help steer your decision-making process.  

We at Space Coast Credit Union are happy to help you figure out the right financing for you to get in the driver’s seat as soon as possible!

Short-Term Car Loans: Pros and Cons

As you’re probably aware, short-term loans have a lot of great benefits. They also take the gold for better car loan interest rates overall. But what exactly is the length of a short-term loan? What may be short to one person, may be too long for another. However, the cutoff between a short-term loan and a long-term loans tends to hover around 60 months.  
  • Lower interest rates: Lower interest rates means you’re not throwing away as much money overall to pay off the loan. Lenders offer lower interest rates for short-term loans because there’s a lower risk that the borrower will default on the loan. At SCCU, we offer car loan interest rates as low as 1.89 percent for a payment period of up to 36 months!
  • Paying off your car faster: Of course, the faster you pay off your car, the faster it means that you 100 percent own it! By paying off that debt, you’re freeing up more cash in the long run to pay for other expenses or to put into your savings account. 
  • Higher monthly payments: This is often the reason why borrowers can’t take a short-term loan. A higher monthly payment may just not be in their budget, especially when that extra money needs to go toward paying off other debts or bills. 
  • May limit the type of car you can afford: A shorter-term loan often means that to have a reasonable monthly loan payment, you need to put down a higher down payment. Borrowers may also have to choose a more economical car over a luxury dream car with all the bells and whistles.  

Long-term Car Loans: Pros and Cons

Long-term loans lately appear to be a more feasible option for borrowers, especially for tight budgets. While there are some downsides, keep in mind that you may be able to refinance your auto loan later down the road, but that’s a topic for another article. You may also have the ability to pay a little more on your loan each month to cut down the length of the loan and pay less in interest overall.

  • Paying lower monthly payments: Longer-term loans attract many borrowers because it frees up more cash every month, especially when you consider that the car requires insurance and may need immediate repairs. 
  • Typically higher interest rates: Lenders will often charge higher rates with long-term loans because there’s a higher risk that something will go wrong during the life of the loan. Also, because the loan is longer with a fixed-rate, lenders prefer to charge a higher interest rate to make up for any potential losses from average rate increases over time.  
  • Paying more overall: Unlike short-term loans, you’re losing more money paying off the interest versus paying off the principal. This is also why experts highly recommend straying away from long-term loans to avoid this downside. 
  • Going “Upside Down”: Unfortunately, cars depreciate as soon as you drive them off the lot. The longer you’re paying off a car, the more value it loses over time. You don’t want to end up with negative equity (“upside down”), which is when the balance of a borrower’s loan exceeds the value of the car. 

Here’s a little tip: Whether you’re getting a short-term loan or long-term loan, it’s a good idea to take out Guaranteed Asset Protection (GAP) insurance in case something happens to your car and you’re still responsible for paying an outstanding loan balance.

Auto Loan Lingo to Know for Calculating Monthly Payments

Let’s talk more about the car loan lingo involved with getting a loan and buying a car. You may recognize some of these words from your high school algebra days, but we’ll give you a quick refresher. After all, you’ll see many of these words in car ads or hear them in conversation at the dealership. Some of the most common words include: 
  • Principal: The initial amount of money you borrow from a lender (without interest). 
  • Down payment: The money you pay upfront before financing. 
  • Interest rate: The cost per year of borrowing money (not including fees). 
  • Annual Percentage Rate (APR): The annual rate charged for borrowing money in terms of a percentage that includes interest and fees you have to pay. These are typically fixed for auto loans. 
  • Amortization: The process of paying off the principal and interest with scheduled installments. 
  • Trade-in value: This is what a dealer offers to pay for your old car to go toward the purchase of your new car. Your trade-in value usually goes toward your down payment.  

Car Loan Calculator: Seeing the Differences among Common Car Loan Terms

Because of amortization, the formula for calculating your monthly auto payments by hand is a bit tricky and complicated. Don’t worry, even the experts recommend using a handy dandy auto loan calculator to get the most accurate amount (and to keep it quick and painless). 

Let’s take a look at the differences among three car loan terms using the SCCU Auto Loan Calculator, assuming the same auto loan of $30,000 with no fees:

48 months:
  • Principal: $30,000
  • Interest rate: 3.24 percent
  • Down payment: $0
Monthly Payment = $667.22
(Total interest = $2,026.39) 

60 months:
  • Principal: $30,000
  • Interest rate: 3.24 percent
  • Down payment: $0
Monthly Payment = $542.27
(Total interest = $2,535.93) 

72 months: 
  • Principal: $30,000
  • Interest rate: 3.54 percent
  • Down payment: $0
Monthly Payment = $463.09
(Total interest = $3,342.79) 

So, while a 72-month loan offers lower monthly payments, you’re paying more money overall because of the higher interest rate. By opting for the 48-month loan in this scenario, you’d be saving hundreds of dollars! A 60-month loan can be a good compromise and offer you some flexibility, especially if you can put down more money some months to pay it off faster—as long as the lender doesn’t penalize you for doing so. However, it’s often worth putting down at least 10-20 percent of the car’s value before financing to save more money overall. 

Additional Fees to Keep in Mind

When you’re shopping around, keep in mind that the car’s price tag doesn’t include all of the additional expenses. For example, insurance is sometimes added onto your loan and repairs. You may want to estimate the total cost of the additional fees to have a better idea of how much you should borrow for your car.  

The actual price of your car is often called the “out-the-door price.” (Or as dealerships say, “TTL fees” for title, tax, and license.) Let’s take a closer look at these extra costs: 

  • DMV title and registration: These fees vary based on the initial registration fee, the weight of the car, and the type of car. 
  • Documentation fee (“doc” fee): This is the dealership’s fee for completing and filing the contract and paperwork. Florida law doesn’t place a minimum or maximum fee for dealership documentation fees. The documentation fee typically ranges from $600-$700. 
  • State and local sales tax: As of 2021, the current Florida state sales tax rate is 6 percent. The local sales tax can vary by city or county. 

What’s the best car term for you? 

If you’re still feeling a bit lost on which car loan terms would work best for you, we recommend talking to an SCCU Express Services Team Member. Remember, it’s best to get pre-approved before shopping for a car in order to know what you can afford. This helps you avoid falling in love with a car just to find out its monthly payment is more than you want to spend. 

Keep in mind that it’s also a good idea to rate shop with multiple lenders within 14 days so that all of the inquiries will only count as one hard hit to your credit scores. We would be happy to take a closer look at your finances to figure out the best options for you and navigate you through the process—with your best interests in mind. You’ll also have a wider range of dealership options with an SCCU pre-approved slip in hand. 

Plus, don’t worry if you’re not already an SCCU member. We’ll open an account for you to help you get a low rate! If you have any questions, feel free to get in touch with us
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