By Regan Carlo, VP of Operations for Metco Credit Union
Understanding how the loan term affects your overall cost is crucial in today’s financial environment. Everyone wants to know when rates will return to “normal,” meaning decrease. Honestly, we don’t anticipate rates will decrease anytime soon.
As I’ve talked about in other articles, the current rate environment is actually pretty normal – we simply grew accustomed to a lower-than-normal rate environment over the years. For instance, in the 1980s the average car loan was 18%; in the 1990s it was 11%; and in the early 2000s it was 9%. Our current rates are in the 7% range, so they’re still quite good!
When you borrow money, the term of the loan is actually more important than the rate. The examples below are based on a $25,000 vehicle loan financed for 48, 60 or 72-month terms.
As you’ll see, a .20% increase in the rate doesn’t change the payment amount much when financed at the same term. However, there is a noticeable difference in both the monthly payment and the total amount of interest you will pay between the 48-month term & the 72-month term.
Understanding the term of the loan is crucial for financial planning. For instance, while a shorter loan term means higher monthly payments, it also results in paying less interest over the life of the loan. Conversely, a longer term lowers your monthly payments but increases the total interest paid. It’s essential to balance the loan term with your financial situation and goals to ensure you’re making the best decision for your circumstances.
So, while the interest rate is important, the term of the loan often has a more significant impact on the overall cost of borrowing. By carefully considering both the rate and the loan term, you can make a more informed and advantageous financial decision. My advice is to focus less on the rate and instead calculate your monthly payment as well as the total interest paid over the life of the loan to ensure you have a full understanding of what your costs will be.
