The Term
When many people consider the term of the loan, they consider how it affects the monthly payment of the loan. The longer term, in general the lower the monthly payment will be. However, you should be aware that the longer you stretch out the term of the loan, the less principal will be paid back each month. This means that the loan will cost you more in interest over its lifetime. It also means that with a longer term, you run a greater risk of being “upside down” in your car a few years from now. If you regularly keep your vehicles for years after the note is paid off, this may not mean much to you. If you enjoy trading in your car every few years, however, this may mean that you will owe more than your car is worth when you are ready to trade it in.
A Balloon Payment
A balloon payment generally sounds like a great idea at first glance, and this is especially true if you plan to trade your car in within a few years. Generally, a balloon structure gives you smaller monthly payments for the first two or three years of the loan, and then will knock you with a large final payment that may be $10,000 or more. When this payment is due, you generally will consider trading your car in or refinancing the note for another three or four years. Often, people do find they are upside down with this type of loan because the amount of principal being paid off each month is minimal. While the monthly payments may be lower, often your best bet for the long term is to obtain a fixed term loan.
The Interest Rate
In addition to the term of the loan and the actual loan amount, the interest rate is the other component that will affect your monthly payments. Often, you will find the best rates by getting your own quotes from banks and credit unions, although at times the dealer financing may provide you with a better rate. It is advisable to shop around and find the lowest rate you can outside of dealer financing, and then take that best quote to the dealer to see if they can beat it.
You should keep in mind while shopping around that new vehicles may qualify for a lower interest and a longer term, but you can generally get a lower sales price when shopping for a gently used vehicle. To get the best possible financing and the lowest monthly payment possible, it is a good idea to compare prices as well as loan rates and terms on a new vehicle against those with the same make and model of vehicle, but that is a year or two older.
