When you apply for a car loan, one of the key items you’ll need to weigh up is how long you anticipate requiring to repay the loan.
Most car loans are set up for a term of around 5 years, however, you do have the option to pick a longer term if you desire. A long term car loan may run for up to 7 years.
That may have seemed like a prudent move when interest rates were sitting at an all-time low and looking unlikely to move for years, but with the Reserve Bank of Australia now signalling there is likely to be a number of rate hikes ahead, it is worth pausing for thought.
Why might I consider a long term car loan?
Of course, the longer the loan term, the more time you have at your disposal to repay the loan. For cash flow reasons, this can be particularly beneficial, because each repayment will be for a lower amount than it otherwise would be if the loan was for a shorter term. This also allows you to step into a car that might potentially be outside your budget. If you have managed to lock in a fixed-rate for your car loan, then at least you are safeguarded from future rate hikes.
What issues might I run into with a long term car loan?
First things first, while you might be able to stagger your repayments over a longer period of time, it does ultimately mean your interest costs are going to be greater across the life of the loan. And with rates only set to increase, if you have a variable-rate car loan then these costs will continue to balloon over time – especially if we hit an interest rate level of 1.5-2% as some have tipped.
Furthermore, if your credit score is poor, your financier is likely to impose a higher interest rate on the loan to mitigate their risk exposure. After all, a longer timeframe introduces a lot of unknowns. Keep in mind as well, once the term of the loan has been set, you may be subject to early termination fees if you try to settle the loan earlier than scheduled.
The other key consideration you may wish to pay attention to is the notion of depreciation. All cars depreciate, that is a fact of life. However, with each year, a new car continues to depreciate at a rapid rate. The difference between years 5 and 7 could be quite significant, meaning that you could find yourself in a position where the remaining value of the loan towards the end of the term is potentially more than the value of the car itself.
Should you unfortunately find yourself in an accident, your problem will be compounded. Alternatively, if there is a change in your financial circumstances, you may be unable to rely on selling the car to settle any outstanding debt.
Finally, it’s worth remembering that many car owners these days consider upgrading to a new car within a 7 year timeframe. Should you wish to trade in the old vehicle, the remaining value of the car loan would diminish the equity that you can put towards a new vehicle.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.