More and more consumers are turning to car credit to finance the purchase of a new or used vehicle. Faced with the choice of the duration of the loan, these buyers are often deprived, especially when it comes to comparing the loan offer with leasing for example.
What are the advantages of short, medium or long term financing when it comes to financing the purchase of a car? Explanations and advice.
Why choose a loan rather than a leasing?
If the leasing solution is today the most widespread approach for the acquisition of a vehicle, the choice of a private loan is attracting more and more buyers. This method of financing:
- Allows you to finance the vehicle in whole or in part. If the buyer already has funds, he can call on the private loan to make up for example the missing amount.
- Ensures total freedom for the buyer: in terms of make and model of vehicle, but also in terms of insurance (full / partial casco), and also allows free resale of the vehicle at any time.
- Avoid having to buy the vehicle at the end of the contract (or take over a leasing).
- Finally allows tax deductions that can be interesting.
What loan term should you choose to buy a car?
As explained by Best bank on its page dedicated to choosing the duration of a vehicle loan, everything will depend on the borrower’s situation and preferences. Indeed, there is no “right” choice, and each borrowing period has its own advantages and disadvantages.
Financing over 12 or 24 months
A short-term loan is in principle reserved for borrowers who have a sufficient budget to assume a higher monthly repayment, but allows to minimize the interest to pay. Alternatively, it is a good solution for people who are turning to a cheap vehicle, or already have personal funds. Indeed, short-term financing:
- Minimizes total interest, and therefore the “cost” of financing
- Induces higher repayment monthly payments
For example, a loan of 35,000 USD over 24 months costs only 2,491 USD in total. On the other hand, the monthly cost (including amortization, interest and death insurance) is 1,562 USD. The borrower repays in total 36,783 USD. *
Financing over 36 or 48 months
This type of medium-term financing is one of the most balanced solutions, which avoids too much total interest while ensuring a controlled monthly bill:
- Balanced total interest
- Balanced monthly payment
For example, a loan of 35,000 USD over 48 months costs a total of 4,989 USD. On the other hand, the monthly payment decreases to 833 USD / month. *
Financing over 60 months or more
Choosing a longer repayment period minimizes the monthly cost, to the detriment of a larger total interest. For this type of long-term loan, it is therefore important to benefit from the lowest possible rate. This type of funding
- Minimizes monthly cost
- Higher total cost
For example, a loan of 35,000 USD over 72 months costs a total of 7,590 USD! On the other hand, the monthly payment will only be 591 USD / month. *
(*): examples calculated with a rate of 6.9%.
As always, the best is to call in a specialist. The best bank thus offers auto loans at the best rates through the free study of each applicant’s file.
More than asking for an offer, it is especially important to finance a vehicle to have a real advisory service on the choice, for example, of the repayment period.