Extending your loan term does indeed lower your total monthly car payment by spreading your total amount financed over a longer period of time. However, what the car salesman is not telling you is that in reality, you’re paying hundreds, if not thousands of dollars more in additional interest and finance charges.
I’ve seen people finance cars with $0 down for as long as 84 and 96 months to get their payments into an affordable range. These people do whatever it takes so they can drive a certain car they want. Personally, I believe that’s crazy! Extending your term out 72, 84, and even 96 months is just asking for trouble.
If you don’t have at least a 15-20% down payment and have to finance over 48 months to fit a car payment within your budget, you may want to consider a less expensive car, save a larger down payment, or wait until you’re a little more financially stable before purchasing a vehicle.
Let’s experiment for a minute. For this example, we’ll finance a new car we’ve negotiated to $18,000 out-the-door. No trade-in, no money down, 7% interest rate, and I’ll use a 6% sales tax rate. There may be some minor state-to-state fees or other costs, but for this example, I won’t use them.
Payment over a 3 year auto loan with $0 cash down |
$18,000.00 | = | Agreed upon new car purchase price. |
$1,080.00 | + | 6% sales tax rate. |
$2,128.86 | + | Interest over a 3 year auto loan at 7% APR. |
$21,208.86 | = | Total of car loan payments over 3 year term. |
$589.14/mo | = | Your monthly car loan payment. |
Payment over a 4 year auto loan with $0 cash down |
$18,000.00 | = | Agreed upon new car purchase price. |
$1,080.00 | + | 6% sales tax rate. |
$2,850.93 | + | Interest over a 4 year auto loan at 7% APR. |
$21,930.93 | = | Total of car loan payments over 4 year term. |
$456.89/mo | = | Your monthly car loan payment. |
Payment over a 5 year auto loan with $0 cash down |
$18,000.00 | = | Agreed upon new car purchase price. |
$1,080.00 | + | 6% sales tax rate. |
$3,588.41 | + | Interest over a 5 year auto loan at 7% APR. |
$22,668.41 | = | Total of car loan payments over 5 year term. |
$377.81/mo | = | Your monthly car loan payment. |
Payment over a 3 year auto loan with $20% cash down |
$18,000.00 | = | Agreed upon new car purchase price. |
$1,080.00 | + | 6% sales tax rate. |
$19,080.00 | = | Subtotal amount financed. |
$3,600.00 | - | 20% down payment. |
$15,480.00 | = | Total amount financed. |
$1,727.19 | + | Interest over a 3 year auto loan at 7% APR. |
$17,207.19 | = | Total of car loan payments over 3 year term. |
$477.98/mo | = | Your monthly car loan payment. |
Although your payment will be higher with a shorter term, you’ll save money by only paying $2,128.86 in interest on the 36-month term versus $3,588.41 going with the 60-month term. That’s a difference of $1,459.55 in your pocket. If you were to take the term out to 42 or 48 months, your monthly payment would be a little less. However, you will start to increase your interest charges.
This is where many people get in trouble with all the in-your-face advertising about, “zero down delivers,” “no money down,” “no money out of pocket.” It’s okay to buy a vehicle with no money down, it will just cost you a lot more in the future.