Differences Between Long and Short Term Car Loans


A lot of people would like to own a car because undeniably, owning a car has a lot of benefits. Having a car gives people comfort, convenience, and speed knowing that travelling anywhere is possible without experiencing the hassles of public transportation.

On top of that, Filipinos look left and right for the right deals, whether it’s buying, leasing, or financing a car. Statistics say that car financing is the most popular way. According to the Consumer Lending Report of Euromonitor International on the Philippines, there had been a double-digit growth of consumer lending in the country last 2016. Among the list of loans, car loans were still at the top with the highest level of growth in that said year.

If you’re already set on financing a car from your trusted financial institution, but torn on how long you should pay off your debt, then take a look at the pros and cons of a short term and long term car loan to find the right one that will best suit your needs.

## Long Term Car Loan

The length of time you pay your loan off will depend on the available terms your financial institution offers. Banks such as like Security Bank, Bank of the Philippine Islands (BPI), Maybank Philippines, Philippine National Bank (PNB), Philippine Bank of Communications (PBCOM), Philippine Savings Bank (PSBank), Rizal Commercial Banking Corporation (RCBC), and BDO offer car financing and their own minimum and maximum car loan terms.

A car loan can be as short as a year to as long as six years, with varying interest rates from each bank and financial institution. The concept of short and long term loans depend on the kind of loan, but for car loans, long term loans are typically with a tenure that are over a year.

### Advantages of a long term loan

In terms of monthly affordability, most people go for a long term loan. Why? Generally, for those who don’t have the capability to shell out a lot every month, this is the most affordable way to pay off their car loan.

Logically, borrowers will pay a lower amount of monthly installments compared to a short term loan since all the payments are spread over an extended period of time. So if you prefer to pay a lower monthly payment, consider getting a loan with a longer term.

### Disadvantages of a long term loan

Be careful, though, since there are disadvantages in getting a long term car loan. Long term loans have higher interest rates than short term loans because a car loan with a longer tenure generally has a higher interest rate, so if you sum up all your expenses, you would have paid for a lot more compared to if you had gone for a car loan with a shorter term.

For example, you have a car loan that you have to pay for six years. That’s 72 months, or 72 times that you would have to pay your monthly installment. That’s fine since you have to pay a lower payment every month, but you have to take account of the interest rate. The higher interest rate spread over a long time will add up to a lot over the duration of the term.

Also, you have to consider the depreciation of cars. It is said that a car’s value depreciates up to 20% every year. The longer you have to pay for your car, the longer you will have to wait before you can sell it on the used car market, and by then, the value of your car will have dipped. In a nutshell, the longer your car loan term is, the lower the amount you can resell it for. But generally, a car’s depreciation depends on the brand.

## Short term car loan

Otherwise, some people opt for a shorter car loan term. This one has a lot of advantages. As opposed to a longer term, a shorter car loan term means that you have to pay less since the term is short and the interest rates are usually lower. Another advantage would be the days to count until you’re debt-free.

The shorter the length of your loan is, the faster you can sleep peacefully knowing that you don’t have any financial obligation to your lender anymore. You can finally enjoy your earnings and allot more for your savings and other expenses. And compared to a long term car loan, a short term car loan would mean a higher resale value for your car because the debt is paid off earlier.

Just be prepared to pay for a lot monthly, though. Short term car loans can have a high monthly payment.

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