The length of your car loan also plays a huge role in determining your payment. Monthly car payments can be found by dividing the loan amount by the loan term, while factoring in interest.
Choosing a shorter loan term allows you to pay off your vehicle faster and pay less overall due to lower interest charges. The trade-off is that a shorter loan comes with a higher monthly payment.
At the same time, extending your loan term will give you lower monthly payments in exchange for a higher overall cost due to increased interest charges. In addition to making the loan more expensive, a long-term loan also costs you future flexibility. One risk of a lengthy loan is you’ll owe more than the car is worth, especially during the first few years, which makes it very difficult to sell or trade in your vehicle, and can cause problems if it’s wrecked or stolen.
Extending the loan term to 72 months or more to make a monthly payment affordable only increases the risk that a loan will become seriously delinquent – especially if you have bad credit. The best plan to follow is to choose an affordable vehicle, put down a sizeable down payment and finance it for the shortest term possible – preferably 48 months or less.