The cost of owning a car is steadily rising. On average, gas prices have increased by 96% since last year. Due to inflation, the average interest rate for a car loan has increased monthly payments. According to Lantern by SoFi, your interest rate can significantly impact how much you pay for a loan.
If your budget has gotten tighter, you may be looking for ways to lower your car payments. One available option is to apply for an auto loan term extension.
Before you take this action, you should know how it can impact you. Here’s what happens if you extend your auto-term loan.
1. Get A Lower Monthly Payment
This is the primary benefit of extending a car loan. You can slash your car note by $100 or more per month, depending on your new terms. A lower car payment can make it easier to pay the rest of your bills or pay down other debt.
2. Extend The Length Of Your Car Loan
To secure a lower car payment, your lender will give you more time to pay the loan. Even if you extend your auto loan term, you can still pay it off early. The extension could mean one or two more years of payments.
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3. Pay More Interest On The Loan
On a car loan, interest is calculated on a daily basis. If it takes longer for you to repay the loan, the costs to borrow the money will go up. An auto loan extension can increase your total loan amount by hundreds or thousands of dollars.
4. The Value Of The Car Will Continue To Decrease
An automobile’s value can depreciate rapidly. As soon as you drive your new car off the lot, it can lose up to 40% of its value. If you have a lengthy car loan, you may end up with negative equity (owing more than your car is worth).
5. Provide Proof Of Financial Hardship To Qualify
Your lender will require documents to support your claim if you request an extension due to financial hardship. Before they grant the request, they will assess it to determine if the hardship is temporary or long-term.
You must demonstrate that you have the financial ability to make your payments on time from now on. Acceptable proof may include an unexpected medical bill or major car repair.
6. Guaranteed Asset Protection (GAP) Insurance May Be Necessary
Suppose your vehicle has negative equity. Your car gets totaled by accident. GAP insurance covers the balance between the value of your car and the amount you owe.
After your insurance company pays the value of your car, you will be responsible for paying the balance. You may need to purchase GAP insurance if you finance your car for longer than 60 months.
Extending your car loan offers a way to get your finances back on track. Be sure to review your financial situation to determine whether an auto loan extension is right for you.