Car Loan 101: How Long Should You Pay?

It's almost impossible for many Filipinos to pay a car's full price. And if you see yourself in this scenario, then chances are you're thinking of getting a car financing scheme to buy that vehicle you’ve always wanted.

It’s probably safe to say that finding the right provider that offers a payment scheme with the lowest interest rates will almost always be on top of anyone's list. And that probably includes your list as well. Whatever the case, you should never overlook one important thing: your car's loan length.

Typically, the maximum length given for a car loan is five years, or around 60 months. But longer terms are already available, and you won't be surprised to find 8-year loan terms (or more) these days. Here are some things you need to know to help you get started:

Length of Owning the Vehicle

Make sure you know how long you plan to keep the car with you. A rule of thumb here is this: the longer you want to keep it, then the longer your loan term should be. And if you plan to change vehicles often, then you should choose a shorter one--preferably shorter than your intended car ownership length.

Keep in mind that a vehicle's resale value drops significantly fast, and it's never a good idea to owe more than what your vehicle is worth when you sell it.

Length of Car Financing Loan

Most car loans are spaced in 12-month increments. They also last between two to eight years. These terms include: two years (24 months), three years (36 months), four years (48 months), and even up to eight years (96 months).

Typically, many car loans offered today last around five years (or 60 months), while the average second hand car loan can take around three or four years.

Interest Rate

How much interest rate are you aiming for? Remember that the length of your car financing loan directly affects your interest rate.  So the longer the loan, the more interest rate you will have to pay BOTH for the rate itself and the finance charges that will accumulate over time.

A shorter loan pays off quicker, and lessens your overall interest costs. The downside here is that you will need to pay more expensive monthly payments.

For example, if a typical three-year loan will slash around P40,000 off of your monthly income, then doubling the loan term to six years will reduce it to around P20,000.

This also doubles your interest rate. And while you might be thinking that the P20,000 monthly payment will lighten your load, the entire loan itself will actually cost you even more due to the added interest rates.

Depreciation

A new car can depreciate around 20 percent as soon as you drive it off your car dealership. So you immediately owe more than your new car's worth at the beginning of your loan. This becomes even worse if you don't pay a large down payment initially.

It takes time to build equity on your car, and it will depend on the price and downpayment that you can afford. A longer car loan means it will take you longer to build equity. And you can't sell your vehicle until you've achieved that. So keep this in mind if you plan to sell your car in case you lose your job or you have a medical emergency somewhere.

A Note about Short Term Loans

Should you choose a short-term loan to finance your car?

While many would advise that short-term loans are the best way to finance a vehicle, there are some cases where they actually don’t.

A car with a longer term and the lowest interest rates is ideal for car buyers that will give you more financial breathing room in case of financial emergencies, such as losing your job or accidents. Also, if paying for lower monthly payments is far more important to you than saving on interest rates, then choosing a car loan with a longer term would be a better option.

Final Tip

Overall, it's best to choose the shortest terms with the lowest interest rates when applying for a car loan. It's always best to avoid those ‘no down payment car loans’, since they can easily accumulate over a period of time and lead you to financial problems in the end.

Bigger monthly car payments over a short term loan may not be appealing to you (at first), but it will definitely save you thousands of pesos on interest rate payments. What's more, you get to pay off your car earlier, which can give lots of room for you to use your hard-earned money for other ventures.