Tips To Follow When Selecting The Term For Your Auto Loan
If your current vehicle is nearing the end of its lifespan, taking out an auto loan from your local credit union is one way that you can alleviate the financial strain of replacing your car. When you're applying for a vehicle loan, the length of the loan (also referred to as the term) is one detail you'll need to consider. Follow these tips to ensure the term for your loan is a good fit for your financial needs.
Practice Making the Payment
You may have concerns about the affordability of your payment. Generally, the longer your auto loan, the lower the payment and the highest your overall interest expenses. To make sure that the payment comfortably fits into your budget, practice making it for two to three months to see how it suits your monthly cash flow. You can deposit the payment amount into your savings account to simulate making the payment.
If it feels like a stretch to make the deposit, you may prefer to explore a longer auto loan term, even if the term has a slightly higher interest rate. A payment that is too high for your budget puts you at risk of missing the payment and incurring expensive late fees. When you find your new vehicle and close on your loan, you'll be used to making the monthly payment, and it will feel less like a shock to your budget.
Take Advantage of Affordable Interest Rates
Auto loans are generally an affordable source of debt, especially if you have good to excellent credit. This type of loan is secured by the vehicle you are purchasing; should you default on the loan, your lender can repossess your vehicle to minimize its losses. These characteristics make the loan lower risk to the lender than other types of loans, like unsecured loans.
If you have other types of debt that you're trying to pay off, it's a smart decision to take advantage of a loan with low interest for as long as possible. This will free up funds to pay off more costly sources of debt.
For example, if you have $10,000 in credit card debt at a 10 percent interest rate and can take out a 5-year auto loan with an interest rate of 5 percent, the auto loan is a much more budget-friendly form of debt than the credit card. It's a wise decision to go with a longer term for your auto loan so that you have more money to pay down your debt with a higher interest rate.
For more information on credit union auto lending, visit a credit union in your area and discuss your options.