For a long time, three- or five-year car loans were the norm. But more and more people are choosing longer-term auto loans.
According to the Q4 2021 Experian State of the Automotive Finance Market report, the average loan term for new car loans was close to 70 months.
Depending on your financial circumstances, obtaining longer-term loans may have one or more advantages. However, there are significant risks associated with longer-term loans, which might make a five-year auto loan or other alternatives a better option.
How long is a normal car loan?
According to the Experian State of the Automotive Finance Market report, the average term of an auto loan was over 69 months for new cars and over 67 months for used cars in the fourth quarter of 2021.
According to the report, people with bad credit typically have longer loan terms on their new car loans than people with good or excellent credit. The typical length of a new car loan for consumers with credit scores between 781 and 850 is close to 65 months. The typical loan term increases to slightly more than 72 months for borrowers with credit scores of 500 or lower.
People may choose longer loan terms for several reasons. Here are a few.
You’ll make smaller monthly payments
Lower monthly auto loan payments may result from a longer loan term. For instance, suppose you were to finance a $30,000 new car purchase over the course of five years at an annual percentage rate (APR) of 3%, with no down payment in a state where sales tax is not applicable. Your monthly payments would be $539 each. With all other loan terms remaining the same, choosing a seven-year loan would result in monthly payments of $396, which is a $143 monthly difference.
However, bear in mind that you will be making more payments for a longer-term loan. In this case, your monthly payments for the seven-year loan would be 84 as opposed to 60 for the five-year term. The longer loan will also result in higher total interest payments for you.
It may free up cash you can use to pay off more-expensive debt
Suppose you are choosing between an 84-month and a 60-month auto loan. Longer loan terms may result in smaller monthly payments, freeing up funds to pay off other high-interest debt sooner. However, this only makes sense if the interest rate on your debt is substantially greater than the interest rate on your auto loan.
Imagine that you are purchasing a new car at 3% annual percentage rate and that you also happen to have a $10,000 credit card balance with a %2020% APR. You could save on interest overall if you decide to take out a seven-year car loan and use the extra $143 you would have each month to pay off your credit card debt. Since you could pay off your higher-interest credit card debt faster with the longer-term loan, even though you would ultimately pay more interest than with the shorter one, you might end up saving more interest overall.
Is a 72-month car loan bad?
Despite the fact that many consumers appear to favor longer loan terms, there are a few compelling arguments for considering the opposite.
You’ll likely have heftier interest costs
If your loan is 72 or 84 months long, you will probably have to pay more interest overall than if it is 60 months or shorter. %20If%20you%20have%20a$30,000, 3% APR car loan (with no sales tax or down payment), you will pay $2,344% in interest over the course of the term. However, the interest on an 84-month loan at the same rate would be $3,301.
An increased interest rate could accompany a longer loan term.
You’ll likely have repair costs while paying down the loan
You might have to continue making auto payments after your warranty has expired if your loan term is longer than 60 months. Many brand-new vehicles have powertrain warranties that last five or six years, as well as basic warranties that last three or four years. Repair costs for cars typically rise with age, so if your warranty expires before the loan is paid off, you might have to pay for repairs in addition to your monthly car payment.
A handful of automakers do offer slightly longer warranties. Kia, Mitsubishi, Hyundai and Genesis offer 10-year/100,000-mile powertrain coverage.
You could end up owing more on your car than it’s worth
It is possible for the value of a new car to decrease by 10% or more in the first year. This depreciation may result in temporary negative equity, or that you owe more on the loan than the car is worth, once interest is taken into account. If you had opted for a shorter loan term, you would have built equity more quickly and avoided negative equity for a far shorter amount of time. This might eventually make it harder to trade in or sell your car.
A car dealer might be able to roll over the amount you still owe on your auto loan into your new loan if you have negative equity and want to trade in your car, but doing so will raise both your monthly payment and the total amount of interest you pay on the loan. Furthermore, you might not be able to sell your car for enough money to pay off your auto loan if you decide to do so. This implies that you would have to find the money to settle the balance owed on your vehicle loan.
If your car is totaled in an accident, negative equity could also pose a significant issue. Usually, collision insurance will only pay the fair market value of your car. You might have to pay for a wrecked car if your loan balance exceeds the value of the vehicle.
Next steps: Consider alternatives to a long loan term
Look into less expensive options like leasing, purchasing a less expensive used car, or delaying your purchase until you have money saved for a larger down payment before taking out a 72- or 84-month auto loan. By choosing this option, you may be able to reduce your monthly payment without running the risk of a longer loan term.
FAQ
Is it smart to do a 72 month car loan?
As a result of the high interest rates and potential for default, most experts concur that a 72-month loan is not the best option. Experts recommend that borrowers take out a shorter loan. Additionally, a loan term shorter than 60 months is preferable for the best interest rate. You can learn more about car loans here.
How long does it take to pay off a $30000 car?
If the initial payment is $5,000, the interest rate is 10%, and the loan term is five years, the monthly payment will be $531. 18/month. Your monthly payment will be $768 with a $1,000 down payment and an interest rate of 2020 percent with a five-year loan. 32/month.
How long is a typical car loan?
Experian’s State of the Automotive Finance Market Report states that in the first quarter of 2023, the average length of a new car loan was 68 months. 6 months, while used-car loans averaged 67. 4 months. That is nearly six years’ worth of monthly payments on an auto loan.
Is 7 years a long time for a car loan?
Stuck with the same car Before agreeing to a car loan that can last up to 84 months, make sure the vehicle is appropriate for your needs and decide if you want to keep driving it for the duration of the loan. Seven years is a very long time.
Read More :
https://www.edmunds.com/car-loan/how-long-should-my-car-loan-be.html