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Why You Should Be Cautious About Long Term Vehicle Loans

Posted by Jane Clothier on 16 September, 2015


At first glance, a loan with a long repayment term can look attractive. With lower monthly repayments, it seems easier to buy a more expensive car, bike, caravan or boat. It’s also easy to think that in a few years’ time, your income will have gone up, and you’ll be able to pay the loan off early. That's why many buyers take out loans that are longer than 5 years, believing it will be easier to cope with the rising cost of new vehicles. On a month by month basis, the expenditure certainly looks more manageable, but if this is your thinking, we recommend thinking again. A closer look at the figures will reveal that you won't get more for your money under a longer term loan. In fact, you may get even less, because a greater percentage of the total cost will be interest added to the premium repayments. Here are some reasons why the loan of over 5 years isn't as good as it first looks.

  • The overall cost of the purchase becomes higher the longer you take to repay it.
  • The length of the term may be longer than the vehicle warranty. If something goes wrong once the warranty ends, you’ll be paying for costly repairs, as well as your ongoing repayments.
  • If it’s a new vehicle, it depreciates very quickly. You risk finding yourself in the auto equivalent of negative equity, as you’re still paying for a vehicle that’s already worth less than the total payment due.
  • How soon do you sell your vehicles? The longer the term, the less likely you are to have a trade-in or resale value.
  • If you pay the loan off early, you may be charged early repayment penalties.
Vehicle dealerships will often try to focus your attention on the monthly repayments, so that you get drawn into longer term loans rather than focus on the overall cost. If you feel unable to afford the vehicle you’ve set your heart on, this kind of tactic is more likely to work. Here are some ways to avoid being manipulated.
  • Aim for no more than a 5-year term. Any longer is to greatly increase your risk.
  • Talk to a specialist finance provider before deciding on a manufacturer and model. This way you can make a decision based on what you can currently afford, rather than what you might be able to afford in the future.
  • Once you have finance in place, talk to a dealership and negotiate a deal. This is a far less risky way to ‘upgrade’ to a more slightly more expensive vehicle. You hold the cards, as the dealer would rather negotiate and make a sale, rather than see you buy elsewhere.
  • Maximise the deposit you put down up front. The closer you can get to 20% of the vehicle cost, the better, as this will at least cover you for the first 12 months of depreciation (yes, it really can be that much).
  • Make sure you have some form of income protection that will cover your repayments. Life doesn't always take the course you expect, and you may find yourself unable to meet your outgoings at some point.
We are always pleased to offer advice and help you decide which type of loan is best for you. We work with over 30 independent lenders and can help find the best deals, lowest interest rates and a greater chance of being approved for a loan than with most banks or direct financial institutions.