How Much Interest Do I Pay On A Car Loan?

The length of the average car loan depends on the term of the loan. According to buyingadvise.com, 45 percent of Americans are financing cars for 5 years. This means that you would pay 60 payments during the average car loan.

Furthermore, buyingadvise.com states that the average American gets a new car every 5.5 years. Using these statistics to calculate this, most Americans only go without a car payment for 6 months every 6 years. The reason that most people do this is to stretch out the loan making the monthly car payments lower.

When buying a car, the car buyer should take into consideration the total amount paid for the car versus the monthly payments alone. This could save a lot of money over the term of the loan.

You and the dealership you are working with determine the amount of payments you make over the life of your loan. There are terms anywhere from 12 months to 84 months. It is a wise decision to do your homework before going to the dealership to purchase your next car. The shorter your can loan the quicker you can pay off your car which will save you interest and give you more months without a car payment.

Fortunately, there are many websites out there that contain calculators for you to figure the difference between a 36-month and a 60-month loan term. Go and Google "car loan calculator" and find a website with a calculator that will figure your monthly payments for you. All you need to do is put in the numbers.

Let me show you an example that demonstrates this difference. If you take a loan for a new car for $ 21,325.00 making 36 payments (3 years) and paying 5 percent interest you will pay $ 639.13 per month and pay $ 1,683.66 in interest. Using that same amount of $ 21,325.00 at 5 percent interest for 60 payments (5 years) you will pay $ 402.43 per month and pay $ 2,820.74 in interest. You end up paying $ 1,137.08 more in interest because of the longer term.

So in this example you can see how even though the monthly payments may be higher for the short term car loan versus the average car loan term of 60 months, you will pay more in interest over the life of the loan. Yes it will cost you more per month for your car but the savings can be well worth the extra payments each month. If you find yourself looking at a car that you must finance for over 60 months just to be able to afford the car payment; then look for a less expensive car that fits your budget.

The next pit-fall to longer term loans has to do with the car's depreciation. If you finance the average car loan over 60 -72 months, you risk the possibility that you will be upside down on the auto loan when you go to trade your car in. Being upside down is when you owe more on the balance of the loan than the car is worth in value. This happens because the car is depreciating faster than you are paying it off with a long-term loan.



Source by Mike Reitz

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