Auto Loan Term Optimization: Finding Your Ideal Balance Between Rate and Duration

5 MIN. READ

 

Key takeaways: 

 

• The total cost of financing a car depends on the loan you get. 
• You should shop around for a good rate and find the right balance between monthly payments and loan terms.
• PFCU can refinance your current auto loan and offers flexible and affordable car loans if you’re shopping for a new or used car. 

How much is your car really costing you? 

Not the initial price tag, but the financing terms you agreed to. The reality of purchasing a big-ticket item is that even if you get a great price on a new (or used) vehicle, a bad financing deal means you’ll spend more than you should. 

Whether you’re in the market for a new car or wondering if you should refinance your current vehicle, it’s time to learn more about auto loan terms. 
 

Understanding the Total Cost of Financing a Car 

Think of the total cost of financing as what you’ve spent by the time you pay off your car in full. It’s the amount you borrowed, plus interest over the years and any fees from your lender.

What impacts the total cost of financing the most is the interest rate or Annual Percentage Rate (APR) your lender charges. Typically, your APR is lower if your lender views you as a low-risk. This means:
 

• You have a good credit score.
• You're not financing the full value of the car.
• You're applying for a short-term loan (which makes you less likely to default in a lender's eyes).
• You're buying a new car, since newer vehicles depreciate slowly.

On top of the APR, you might have to pay an origination fee, payment processing fees or late payment fees over the years, which account for a small part of the total cost of financing.

Choosing a short loan term can be tempting, but your monthly payments will be higher. The key is to find the right balance between financing terms that help you get a good APR while keeping your monthly payments within your budget.
 

A Word of Caution: Don’t Finance at the Dealership 

Walking into a dealership, picking out a car, and getting financing within the hour sounds convenient, but here’s why you shouldn’t do it. 

Auto dealerships can tack on a financing fee as a higher APR than the lender offers. It means you’re paying more for the same loan you could get by contacting the lender directly. 

Instead of financing at the dealership, we highly recommend getting pre-approved: 
 

• You can shop around and compare APRs and lender fees. 
• There is no pressure to pick a financing deal right away. 
• You can run different scenarios to better understand how loan terms and monthly payments impact the total cost of financing. 

How to Finance a Car for Less 

Besides optimizing your loan term and monthly payments, there are strategies you can use to save on financing your next car.
 

Shop Around 

Not all lenders offer the same deals. Their costs can vary, and they’ll typically consider different things when reviewing your application.

You’ll notice a big difference between banks and credit unions. Because credit unions aren’t for-profit, they often have much better rates on car loans. For instance, the average credit union loan rate is only 5.82% for a used car financed on a 48-month term. Traditional banks charge an average of 7.78% on that same product. 

It can seem like a small difference, but over the 48-month duration of the loan, you would spend $2,466.49 on interest for a $20,000 car financed at 5.82%. At 7.78%, you would pay a total of $3,337.39 in interest. That’s almost $1,000 saved! 
 

Consider an Early Payoff 

Once you have secured an auto loan at a low rate, you can save even more with an early payoff. The only time you shouldn’t do this is if your lender has an early pre-payment penalty, which is something to watch out for when comparing lending options. 

To go back to our previous example, financing $20,000 at 5.82% is the equivalent of paying around $468 a month for four years. If you can add an extra $100 each month, you’ll pay off your car nine months earlier and save close to $500 in interest.
 

Refinancing Your Auto Loan 

Even if you financed your vehicle at the dealership or picked a car loan that you regret, refinancing is always possible. It’s a simple process:
 

• You’re taking out a new loan.
• The balance goes toward paying off the old loan.
• You get a new monthly payment and interest rate.

It pays to shop around and look for the best auto refinance rates. You can save a lot thanks to a lower APR, but you also have the option of going for a longer term if you want lower monthly payments. 

Before refinancing, review your finances and look for ways to improve your profile. Paying off a credit card can lower your debt-to-income ratio and make your refinance application look better.
 

Power Financial Credit Union Offers Flexible Car Loans (And Refinancing Options)

The right auto loan terms can save you thousands over the years. PFCU makes it easy to find that perfect balance between affordable payments and low total interest costs with flexible car loans, including refinancing options. 

If you’re in the market for a car or feel like you’re paying too much for your current loan, we offer financing with flexible terms of up to 96 months. Plus, thanks to our convenient pre-approval process and Auto Advisors program, shopping for a new car has never been easier.

Contact us to learn more about how to refinance a loan or take a look at our auto loan rates.

FAQs About Auto Loans 

What is the best auto loan term length for saving money? 

From a lender's perspective, a shorter loan term means fewer risks. If the monthly payments work for your budget, a shorter term loan is typically the best option for saving on interest.

How does refinancing a car loan work? 

When you refinance an auto loan, you borrow money from a new lender to pay off the old one. You’re then making monthly payments to the new lender. 
 

What credit score do I need to get the best auto loan rates? 

A score of 800 or better will help secure lower interest, but you can get affordable car loans with a lower credit score if you shop around. 
 

Should I get pre-approved before shopping for a car? 

It’s best to do so because financing at the dealership rarely gets you the best deal. Plus, you’ll know exactly how much car you can afford. 
 

What's the difference between bank and credit union auto loan rates? 

Because credit unions have a not-for-profit model, they can pass on any gains to their members through lower APRs. You’ll typically get a better deal when you finance a car via a credit union.