Why It May Be Advisable to Keep a Car Loan Repayment Period Short

26 October 2015
 Categories: , Blog

The tough economic times have compelled many people to look for ways to limit how much they spend each month. One way has been to negotiate a long duration for car loans, so that monthly payments are as low as possible. This article discusses three reasons why it may be better for you to limit the number of months over which you will repay your car loan.

Negative Equity

Your home and your car may be your biggest assets. As such, it may be good to have equity in both of those assets so that you can refinance in order to get more cash for urgent expenses, such as paying for medical care that is not covered by your insurance. A long repayment period delays equity building in your car. This is because annual depreciation may render you to be indebted to a level that is higher than the value of the car, especially if the down payment you made was very low. A shorter repayment period helps you to build equity faster, since you make bigger monthly payments and reduce the car loan quickly.

Car Fatigue

Carmakers are constantly bringing new models of cars onto the market. Those new cars may be more fuel efficient and more attractive than earlier models. Consequently, you may wish to trade in your current car for a new one. Long repayment schedules mean that you may continue making car loan payments without a break.  To some people, that can appear no different from a car lease. A short repayment period allows you to pay off the loan and take a break before you buy another car and resume car loan payments.

Low Resale Value

Lengthy car-loan repayment periods may also lead you to delay to put your car on the used car market. This is because buyers prefer to buy cars that are free from any encumbrances. For instance, a 5-year car loan allows you to sell your car when it is 5-years old while a 7-year loan may make you put off that sale for an extra two years. From a buyer's perspective, a 5-year old car may be more attractive than a 7-year old car of the same make and model. That is why you should be foresighted enough to negotiate a shorter repayment period for your car loan.

As you can see, you need to consider several factors before requesting for a lengthy car-loan repayment period. Use the information above to ask for the shortest repayment period that your finances can allow so that you avoid the pitfalls of repaying a car loan for very many years.