One of the best ways to save money when buying a car is by paying cash for the car. The problem is that most people do not have enough cash to accomplish this, and this is why many people turn to auto loans when they want to buy cars. Did you know that if you want to save money on your next auto loan, you can easily do this by choosing a shorter loan for the purchase? A shorter loan will save you money in several ways, and here is an explanation of how this works.
Loan Duration Affects Interest Rates of Loans
Auto loans can be as short as 12 months in some cases and as long as 72 or 84 months, and there might even be options that are for periods of time longer than this. In any case, the duration of an auto loan will affect the interest rate. When loans are shorter in length, borrowers pay them off faster. The result is that shorter loans generally offer lower rates of interest. When loans are longer, the lenders have to loan money for a longer amount of time and may charge higher interest rates to accommodate for this.
As you consider the duration of the loan you need, how many months do you need to repay it? For example, if you are leaning towards 60 months, you may want to consider whether you could afford to repay it in 48 months. If so, you might get a better rate on your loan.
You Will Pay Less Interest by Borrowing the Money for Less Time
Choosing a shorter duration for your auto loan will also help you save money simply because you will pay less interest if you borrow money for a shorter time frame. The amount of interest you pay for a loan is not just based on the interest rate, but it is also based on the length of time the loan is for. The longer you take to repay a loan, the more interest you will pay for it.
You Will Build Equity Faster
One last thing to note is that paying off a car faster helps you build equity faster. The benefit of this is that you could pocket more cash if you sell the car sometime soon, and you would also have a lower chance of having to roll over some of the loan into the next car you buy if you trade this one in before paying it off.
With good credit and money to put down, you will have more options to choose from for your next car loan. When you are ready to make your purchase, talk to an auto loan lender to find out what options are available for car loans.