Car Loan: Take the Extra Year?

It’s always tempting when taking out a loan on an automobile to go an extra year.

The reason for the temptation is clear – it lowers the monthly payment on the vehicle. We typically budget in months, pay our bills by months, pay our auto loan by months, so it is natural to focus on the monthly payment when buying a car.

However, taking that extra year can often mean taking more money out of your wallet for the overall payment. That is something you might like to avoid, if possible.

Here’s an example used by the Federal Deposit Insurance Corporation in their booklet 51 Ways to Save Hundreds on Loans and Credit Cards: a $25,000 loan at 7 percent interest will come to a monthly payment of $772.  Not a fun monthly payment.

If you stretch the figure out over five years, the monthly payment shrinks to $495.  However, the catch is that you add $2,000 onto the overall cost of the car. Yes, $2,000.

In addition, your car is going to be older when the loan runs out and you decide to get rid of it. That means more miles and less resale value for the car.

So the next time that you buy a car, be sure to keep this information in mind.