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If you plan to finance a new or used car, opting for a shorter loan term could be a good idea. The toughest part about picking a short-term loan is the higher monthly payments. But if you can afford a higher payment, there are some major benefits to going with a short-term auto loan. Here are five of them.

1. A shorter car loan term typically has a lower interest rate

The front line at a car lot.
The front line at a car lot. | Getty Images

By going with a shorter car loan term, like 36 months, you will most likely benefit from a lower interest rate. We say “most likely” because different lenders and banks will have different loan rates, which can vary depending on your credit situation. Either way, paying less on interest over time is a good thing. So, if you have the option to pick a lower term and receive a lower interest rate, do it.

2. You can build equity in the car faster

A leasing and sales office at a dealership.
A leasing and sales office at a dealership. | Getty Images

Build equity on a car? But isn’t it a depreciating asset? It is. However, the car you plan to buy has a certain value at the beginning of the loan term and a lower value by the end of it. That means if you can pay off the loan quickly – like in 36 months compared to 60 – your car will be worth more by the end of the loan term. There’s also less of a chance that you’ll be underwater on the loan – or owe more than the car is worth.

3. Save money on car insurance

Car leasing and financing signs seen in the 1980s at a Lincoln Continental showroom
Car leasing and financing signs in the 1980s | Michael Brennan/Mirrorpix/Getty Images

When you finance a vehicle, your car insurance company will most likely give you full coverage to protect it. Full coverage insurance can cost a pretty penny, but if you pay the car off sooner, you can opt for less coverage, which will cost you less every month.

4. Use the savings for investments or other things

A blue SUV with a family looking at it in a dealership, potentially wonder why SUVs are so expensive.
SUV in a dealership | Maika Elan via Getty Images

Since you’ll save money by getting a lower car loan term, you can use all of that money you saved for investments, vacations, or other things you want/need. So, while every other driver that financed their car for five years is still making payments, you can be soaking up the rays on a beach somewhere – or in your newly remodeled backyard.

5. Opting for a shorter loan term will save you money on the total interest paid

Not only will opting for a lower auto loan term save you money every month with a lower interest rate, but it will also save you money on the total amount of interest you’ll pay.

To use an example from Lending Tree, if you finance a car that costs $38,948 with an APR of 8.06%, you’ll save a lot more money with a shorter loan term. For clarity, a 36-month loan term would yield a monthly payment of $1,192 and a total interest amount of $4,909.

However, if you opt for a 60-month term with the same factors, you’ll have a monthly payment of $772 and a total interest amount of $8,301. That’s a difference of $3,392 paid between the two loan terms.

So, although a shorter loan term means a higher monthly payment, it could save you thousands of dollars in the end.

Disadvantages of getting a short auto loan term

As stated before, the main disadvantage of opting for a shorter loan term is the higher monthly payments. By having higher payments, you’ll have less money every month for other expenses. However, if you can afford the payments, you’ll enjoy the advantages outlined here and ultimately be able to enjoy a paid-off car much sooner.