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Is a long-term auto loan is a good idea? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial choices by offering financial calculators and interactive tools that provide objective and original content. We also allow you to conduct research and compare data for free and help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this site are from companies that pay us. This compensation can affect the way and where products are displayed on this website, for example such things as the order in which they may appear within the listing categories and other categories, unless prohibited by law. This applies to our loans, mortgages,, and other home loan products. This compensation, however, does affect the content we publish or the reviews that appear on this website. We do not include the entire universe of businesses or financial deals that may be open to you.
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4 min read Read Published 30 January 2023
Authored by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ins and outs of securely taking out loans to buy an automobile.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances with precise, well-studied information that is broken down into complicated subjects into digestible pieces.
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A car purchase is more than just deciding to get an SUV or sedan in black or red. If you’re buying the car using the help of a loan it is also necessary to figure out which repayment terms make most fit for your financial and budget objectives. Car prices are still steep compared to before the COVID-19 pandemic. The price of a new vehicle in December 2022 was greater than $49,500 – five percent more than the same month a year prior and over 20 percent higher than December 2020 . The longer the loan term — typically between 24 and , or two to seven years — the lower your monthly payments will be. But remember, having a lower monthly cost has drawbacks, including potentially costing you more over the long run. For most people, a long-term car loan should not be a great choice. There are many reasons not to take out taking out a long-term loan longer-term car loans are appealing because the monthly payments are less than those for short-term loan. Though they allow you to buy a larger car , but still make payments that are affordable, car loans can put you in a bind financially If you’re not careful. More likely to become upside down on a loan A longer loan term means you are more likely to end up being upside down sometime in the future. Being upside on a car loan means you owe more than the car is worth. This is due to a greater portion of the monthly payment early in the loan will be spent on interest rather than the principal amount owed. Being upside down can be dangerous for several reasons. If you are involved in an accident in which the vehicle is considered to be a total loss, you could be left having to pay off the loan on a vehicle that you can no longer drive if the insurance won’t cover the cost. Additionally the longer you’re upside down on the car loan and the longer you’re in negative equity. The idea of trading in a car that has negative equity means you likely will not be able to pay back the loan and you may even have to you take out. Vehicle depreciation Depreciation isn’t a major issue with used cars since a in its first few years. However, long-term car loans for used vehicles generally aren’t the best idea. A used car likely already has an impressive amount of miles on it and a longer-term car loan will allow the miles to accumulate even more. For example, assume that you purchase a vehicle that’s three years old with 36,000 miles, which is what the average American is driving in the same amount of time. If you take out a six-year loan and travel 12,000 miles per year, which is the standard in America is 72,000 miles. This would mean your car would have 108,000 miles and will be nearing 10 years old by the time it’s paid off. If you opt to sell it earlier, you may find it’s not worth the money, or worse, that there is no equity at all. Higher interest Longer-term lengths typically are accompanied by higher rates . This is because longer loans are more risky for lenders. With a longer loan period, there’s a greater chance things could impact your financial circumstances before the loan is fully paid. Even when the interest rate on a long-term loan is similar to one with a shorter duration however, you’ll still have to be paying more interest over the duration of the loan because you will be paying interest over a much longer time. Although your wallet might be relieved from the reduced amount of interest, the sacrifice might not be worth it. This is a particularly important aspect to consider because you consider that the Federal Reserve continues to to address pandemic-related inflation. When the Fed raises benchmark rates, it drives up the interest rates that private lenders provide for personal loans and auto loans. The average new loan rate for 2022 was 5.16 percent . However, rates ranged between 3.84 per cent for those who have the highest credit scores, to 12.93 percent for borrowers with the weakest or the least subprime scores. Are you stuck with the same car? Before signing off on an auto loan that’s up to 84 months, make sure you’ve considered whether you will want to drive that same vehicle throughout the duration. Seven years is a very long period of time. Your circumstances and requirements might change. But, with a long-term loan, you will be stuck with the same car. Most of the time you will have to pay the loan will cost you money. Alternatives to a longer-term car loan There are other alternatives to get a vehicle without taking the risk that comes along with a long-term auto loan. Lease a vehicle If you’re having trouble getting an approval for a favorable loan it is possible to . Leases can offer more affordable monthly installments. Even drivers with fair credit are more likely to receive the lease they want and be driving a fairly new vehicle. The disadvantages of leasing should be take note of. They include limitations on the number of miles you can drive the vehicle during the lease term and charges in excess wear and wear and tear. Perhaps most important of all, you’ll have to either or return the car at the lease’s end. Co-signing with a person who has excellent credit rating provides prospective lenders with additional assurance that you’ll pay back the loan. This increases the likelihood to receive approval, even if your own credit isn’t perfect. Set up a high-down payment If you want to cut down on your monthly expenses and save money, a high down payment down payment is an excellent alternative. The greater the amount you put down initially, the lower the monthly cost will be. Additionally, you will be offered better interest rates with your lender. Are long-term car loan worth the risk? A long-term auto loan is not usually an ideal option due to the risk of financial loss. While the lower monthly payment on a long-term car loan might be attractive at first, it is better to save up some extra cash to make the amount of down payment, or select a less expensive car and ensure that the monthly cost is reasonable for a smaller loan. The main point to remember before signing on to a long-term car loan take into consideration the disadvantages. In addition to costing you more over the loan’s term it could also mean that you end up becoming upside down on the loan . What’s more, your vehicle needs could be different within 5 to 7 years, when you’re still paying back that loan. Think about options for long-term loans, such as paying a higher down, leasing a vehicle or securing a co-signer whose credit score could help you achieve better loan terms.
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Writen by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ins and outs of securely using loans to buy an automobile.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing precise, well-researched and well-structured information that breaks down complex topics into manageable bites.
Auto loans editor
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