Paying the full amount for a car for sale is an impossibility for most Filipinos. If this is your situation, then you’re probably thinking about entering into a car financing scheme to purchase the car you want. For sure, you’re looking to find the right provider and the lowest interest rate to ensure you finance a vehicle purchase with as little issues and effect to your savings as possible. But what about car loan length? Have you thought about whether short term or long term is best for your situation?

For many years, the maximum length of a car loan was five years, or 60 months. If these are still the numbers you’re familiar with, you’ll be surprised to learn that this is no longer the case, because today, depending on where you obtain your car loan from, you can get one that lasts for 8 years, or maybe more! Carmudi offers you the following guidelines to help you be better informed to decide which car loan term is ideal for you.

How long do you want to own the car?

When choosing a car loan term, your first concern is to identify how long you intend to keep the car. If you plan to change cars often, then you need to choose a shorter term. Preferably, shorter than your intended car ownership length. Car resale values often drop quickly and significantly, and you don’t want to owe more than what the car is worth when you decide to sell it.

How long can you finance a new car?

Generally, car finance loans are available in 12 month increments and last between two and eight years. That means you’ll find car loans for you in 24 months (2 years), 36 months (3 years), 48 months (4 years), up until 96 months (8 years). The average new car loan is around 60 months or 5 years, while the average second hand car loan is 3 to 4 years.

How much interest rate should you go for?

The length of your car financing loan directly affects the interest rate that you have to pay. Therefore, the longer the loan, the more interest you’ll have to contend with, both in terms of the rate itself and the finance charges that accumulate with time. A shorter loan pays off the car faster and lessens the overall interest costs. However, the tradeoff is that you’ll have more expensive monthly payments. Let’s say with your current finances, a three-year loan takes up half of your monthly income. By doubling the loan term to six years, you reduce the amount you have to pay monthly by half, but you also end up doubling your interest rate. Sure, the lower monthly payments will be easier on your pocket, but the loan will cost you more overall.

Depreciation and the role it plays in car loan rates

A new car can depreciate by as much as 20 percent the moment you drive it off the dealership lot. This means that at the beginning of the car loan, you immediately owe more than the car is worth. Your situation gets even worse if you failed to put down a large enough down payment.

The time it takes to build equity on the car will depend on the price of the car and the down payment amount you can afford. That said, a longer car loan means that it will also take you longer to build equity. As long as you haven’t achieved equity on the car, then you can’t sell it if you need an immediate source of funds, such as a medical emergency or job loss. The buyer will only pay you what the car is worth, and you still have to pay off the remaining balance.

Likewise, if you figure into a vehicular accident and the car is considered a total wreck, your insurance provider will only pay you what the car is worth at the time of the accident, and you will have to pay for the remainder of the repair or replacement costs out of your own pocket.

The reality that is car fatigue

A car is a joy to have brand new. But when it’s three to five years down the line? Maybe not so much. When the honeymoon period is over, most car owners will be eager to trade their used car for something else. If you have an 8-year loan and you’re anxious to buy a new car around the 5-year mark, then you would never have enjoyed the car without payments, which negates the point of buying a car in the first place. If you plan to change cars frequently, then you’ll be better of leasing than buying. On the contrary, if you choose a short-term loan, say, three years, and you decide to sell the car after five, then you get to enjoy two years of freedom from car payments. You’ll also have no problem selling the car whenever you like.

Is a short term loan always the best way to finance a car?

Not necessarily. A car oan with a longer term can be extremely beneficial for those who are unsure about their source of income in the future. For car buyers in this situation, choosing the longest possible loan with the lowest interest rate can give you some monetary breathing room in case you lose your job or if other financial emergencies arise. Also, if you value lower monthly payments than saving on interest rates, then by all means, choose a car loan with a longer term.

Final Tip

Overall, the best case scenario for your finances is the shortest loan term with the lowest interest rate. And avoid ‘no down payment car loans’ if you can, because it’s a very easy way to drown yourself in a sea of monetary troubles. A larger monthly car payment courtesy of a short term car loan may not be the most appealing position, but in the long term, you’ll be able to save thousands of pesos in interest and paid off your car earlier, which can give you plenty of wiggle room with your finances in the future.