Rates and terms are subject to change without notice. Example: A six year fixed-rate loan for a $25,000 new car, with 20% down, requires a $20,000 loan. Based on a simple interest rate of 3.4% and a loan fee of $200, this loan would have 72 monthly payments of $310.54 each and an annual percentage rate (APR) of 3.74%.
Pros: Lower monthly payments: Many choose to get a 72-month loan because the monthly payments are lower. And, borrowers may be able to get a more expensive used or new car and still stay within their budget.
As a general rule, you should pay 20 percent of the price of the vehicle as a down payment. That's because vehicles lose value, or depreciate, rapidly.
If you take out a $35,000 new auto loan for a 72-month term at 4.0% interest, then your monthly payment will be $547.58. Although your monthly payments won't change during the term of your loan, the amount applied to principal versus interest will vary based on the amortization schedule.
What Are the Disadvantages of a Large Down Payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings. Depending on the vehicle you choose to buy, 50% can be a lot of money to put down on an auto loan.
Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
Lenders consider long-term loans riskier and consequently charge higher interest rates for them. You'll also spend more time paying down interest at the start of the loan before reducing the principal, adding to your loan's overall cost.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.
Credit scores: People with higher credit scores typically qualify for lower interest rates, which reduces monthly payment amounts. For example, the monthly payment for a $30,000 loan with a 48-month term and a 7% interest rate is $718.39, compared with $760.88 per month for the same loan with a 10% interest rate.
You should have a credit score in the mid to high 600's, to increase your chance of approval. If your credit score is lower than this, you may want to apply with a cosigner. If you don't qualify for an unsecured personal loan due to your credit score or other factors, you may want to consider a secured loan option.
Some banks and credit unions may offer 72 months on a 3 or 4 year old car for most consumers, but may limit others based on credit criteria. Factory supported lenders (like BMW FS, Ford Motor Credit, ETC) may offer longer terms on their own brands, but limit off brands.
Assuming annual compounding, the interest owed at the end of each year is: interest owed = principal * interest rate = 35,000 * 9% = 3150.
Reason 1: Higher Total Cost
But you will likely be paying more over the lifespan of the loan due to accrued interest. The longer the loan term, the more interest you will pay in total. So, the 72-month loan would save you nearly $4,000 compared with the 96-month loan. An even shorter loan term would save you even more.
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%.
Extra payments made on your car loan usually go toward the principal balance, but you'll want to make sure. Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want.
By the end of one year of making biweekly payments, you will have made the equivalent of 13 payments on your loan instead of just 12, which helps reduce the principal on your debt even faster. It helps move you toward an early payoff date without significantly increasing the amount you put toward your loan each month.
Paying off a car loan early can save you money on interest and improve your debt-to-income ratio. Early loan pay-off can also give you ownership of the vehicle sooner and reduce the risk of being upside-down on the loan. Before deciding to pay off your loan early, consider if your money could be better spent elsewhere.
No down payment means a bigger car loan, leading to more interest (unless you pay your car loan off early). You might also need to choose a longer term to keep your monthly payments affordable, which means you'll pay more interest over the life of your loan.
Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment. If that leaves you feeling you can afford only a beat-up jalopy, don't despair.
A low credit score's impact on your loan conditions decreases as you put more money down. Lenders are always going to be hesitant to lend to someone with a low credit score, so a larger down payment can help make them feel as if you're less risky.