Choosing an auto loan for your new car is a big decision. It can affect your monthly finances, your credit, and your ability to sell the car down the line.
The most common auto loans are 3-year loans and 5-year loans. Here are the benefits and drawbacks of each:
3-Year Auto Loan
Benefit: These loans are less expensive overall. They are less risky for the lender, so they carry a lower interest rate. If you anticipate having very solid income for the next three years, a 36-month plan will save you money over the course of the loan. It will also allow you to pay off your car faster, meaning you can resell it sooner. That is a significant benefit, since cars depreciate quickly.
Drawback: 3-year plans come with a higher monthly cost. This can eat into your monthly budget. Even if you can afford it now, if your financial future is uncertain—if you know you’ll be looking for a job in six months, for instance—you may not want a 3-year loan. These expensive monthly payments leave you less discretionary income to handle life’s uncertainties, whether it’s unemployment or unexpected medical bills. You cannot eliminate these uncertainties, but if you anticipate having them, a high monthly payment might not be your best option. Read More