The lengths of car loans can vary by year, ranging from 24 to 84 months. Of the various options, a short-term car loan that's only a few years long has several advantages over longer-term loans.
Have a Debt-Free Car Faster
The most obvious benefit of short-term car loans is that they're paid off quickly. In just two or three years, you could own a vehicle outright. You'll have no monthly payment once you pay off the loan, and you'll receive the full sale price whenever you decide to sell the car.
In addition to the financial benefits that come with paying off a car loan quickly, some people just like knowing that the car they drive doesn't have any debt on it.
Save on Interest Payments
You'll pay less total interest on a short-term car loan than you will on a long-term one, and there are a couple of reasons why.
First, the outstanding balance on your loan directly impacts how much interest you pay each month. The amount of interest is calculated as a percentage of the outstanding balance.
A significant portion of your monthly payments goes toward the loan's balance if you have a short-term car loan. Thus, the payments accelerate how quickly the balance goes down -- and reduce how much you're paying interest. Even a small reduction in monthly interest paid can accumulate into big savings over the course of a loan.
Second, lenders are often willing to provide lower interest rates on short-term loans. An interest rate represents the projected value of money, and the rate takes into account future uncertainties. Because there is more uncertainty the further out you go, lenders must charge higher interest rates on longer loans. Short-term car loans usually get the lowest interest rates.
Save on Insurance Premiums
Lenders require you to purchase gap insurance in order to protect their financial investment in a vehicle.
Gap insurance provides financial protection for any difference between what you own on a car loan and what your car is worth. Should you owe more than your car can be resold for, gap insurance will cover this financial gap.
Because the balance on short-term car loans can be paid down so quickly, you probably won't ever owe more than your car could be resold for if you get this loan. As long as your balance is always below the car's value, you won't have to purchase and pay for gap insurance.
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