When you want to purchase a car, most of the people in Canada will opt to take a car loan. Even though you have to pay a sum of money for several months, you prefer this option, as it is affordable and convenient.
When it comes to taking a car loan, you will have this question in mind – what is the ideal length? Here is a guide which will help you make the right decision:
Short-term loans
When you take a short-term loan, say for 36 months, there are a lot of advantages. For starters, you can pay off the loan within a shorter time frame. As a result, you can take another loan from a financial institution, for other personal reasons.
Similarly, you never have to pay a sum which is much greater than the value of your car. How is this possible when the monthly payments are so high? Take a look at how much you spent at the end of the loan, to get the bigger picture.
Long-term loans
Taking a look at long-term loans, which extend over five years, they are a favorite among consumers. The main reason why it's popular is that these types of loans bring down monthly payments significantly. As a result, consumers tend to believe that they are getting a bargain deal for long-term loans. However, this loan is a bad decision, because you are spending large sums of money in the long run.
Example
Imagine you want to purchase a car worth $20,000 from a dealership. If you go for a 36-month loan with an interest rate of 4%, you have to make monthly payments worth $590.48. At the end of the loan, you would have paid $21,257.27, which is only $1,257.27 more than the value of the vehicle.
In the same situation, imagine you want to take a loan for 72 months, with an interest rate of 6%. The monthly payments of the loan are $331.46 and you would have paid $23,864.96 at the end of the tenure, which is $3,864.96 more than the actual price of the vehicle.
When you are taking a car loan, make sure you try to keep the tenure as short as possible, as you are paying lesser at the end!