Should You Walk Away from Short-Term Buy Here Pay Here Auto Loans?

Low monthly credit payments are convenient. It helps to keep your budget in check. It also allows you to buy a costlier car because you can still make room for a few extra dollars. But all these are often made possible with long-term auto loans where the credit span extends to well over 5 years. On the surface, it might seem like everything is fine but are actually paying more for buy here pay here cars with a 5-year loan in comparison to a 3-year loan.

So, you should not walk away from a short-term buy here pay here auto loan just because you thought of paying less per month for an expensive used car. You need to understand what exactly happens with long-term loans and figure out ways to stick to your budget without having to extend your auto loan span.

Longer duration means more risk

No one generally talks about this factor because long-term loans are beneficial for both the lender and the borrower. One receives more interest payments while the other gets to pay less every month. As you stretch your loan span in a buy here pay here dealership in Spartanburg, SC, your associated default risk rises. And this makes the lender or the dealer eligible to charge a higher interest rate for the same amount of auto loan. With the net amount spread over more months, you feel that you are paying less. But if you add up the total payments, you will see that the interest rate you paid is actually higher.

Chance of going upside-down with long-term loans

If you are dragging your loan span, chances are that you are looking at expensive used cars for sale. And by taking a higher amount of auto loan spread over 60 to 84 months, you might find yourself in an upside-down condition if your car is totalled sometime soon. After the accident, the insurance company will only pay your car’s net value at the time. You will still owe your interest rate payment and the depreciation factor (difference between the price you paid and the current value) that you have to pay from your own pocket. Customers who opt for extended loans and expensive used cars are prone to upside-down conditions. However, shorter loan spans bring down your amount due faster and you rarely go underwater.

You get ownership faster

Probably the best reason to go for short-term 3-year loans is to take complete ownership of your used car faster. Until you pay off your auto loan, the title of the used car stays with the lender. And you cannot use this asset to bail you out of a financial crisis. But if you have the title, you can sell your car, trade in to upgrade the vehicle, or take title loans to help you temporarily. Having your title stuck with someone else for 5 to 7 years does not make sense. By the time you take ownership, your car would have lost most of its value and you cannot use the underlying asset value to its full potential.

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