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Maximum auto loan terms: What’s recommended?
Is a 72-month or longer auto loan a good option for you, even though most car buyers choose long-term loans?
NerdWallet advises limiting the length of time you can finance new cars to 60 months and used cars to 36 months. You can steer clear of some of the drawbacks associated with long-term loans by using these maximums.
But it’s getting harder for some car buyers to avoid long-term auto loans as interest rates have increased and car prices have hit record highs in recent years.
Why go with a long-term car loan?
There are good reasons why some buyers of cars go with a lengthy auto loan, like in the following cases:
It’s the only way to buy a car
Some people in the current auto market are merely unable to make the payments when financing a vehicle for less than 60 months. Furthermore, buyers of cars with bad credit may only be eligible for long-term auto loans in certain situations. For essential needs like commuting to work, obtaining a car may require accepting a long-term auto loan.
Your good credit earns a very low interest rate
In the current market, special low APR offers are less common, but some automakers still provide them; typically, these are limited to borrowers with good or excellent credit.
If you qualify for a special rate, for example 1. 99% APR for up to 2072 months, with the option to shorten the loan term by making a sizable down payment. But considering the low interest rate, it might make sense to use the down payment to pay off credit cards and loans with higher interest rates.
Long-term auto loans can have positives and negatives. Compare your benefits to your risks to decide if continuing past 72 months is a good idea for you.
Reasons to avoid long-term car loans
Since monthly payments for a long-term auto loan are lower than those for a shorter-term loan, at first glance, the long-term loan might seem like a good deal. However, over time, you’ll pay more interest overall, and it might be a sizable amount.
Here is an illustration of the interest paid on an 84-month auto loan, with no change in loan amount or annual percentage rate, in comparison to financing for 60 and 48 months. Note that these loan examples reflect no down payment.
|
Loan amount/APR |
Term |
Monthly payment |
Total interest |
|---|---|---|---|
|
$35,000/9%. |
48 months. |
$871. |
$6,807. |
|
$35,000/9%. |
60 months. |
$727. |
$8,593. |
|
$35,000/9%. |
84 months. |
$563. |
$12,302. |
From 48 to 84 months, there is a nearly $5,500 increase in the total interest paid.
Lenders usually charge higher interest rates for long-term auto loans
Lenders view longer-term loans as riskier because borrowers have more time to default on the loan. When you extend the loan term, they frequently charge a higher interest rate to offset that risk.
Here is an example of the difference in total interest that shows a rate increase by term for an 84-month loan when compared to financing for 60 and 48 months. Note that these examples include no down payment.
|
Loan amount/APR |
Term |
Monthly payment |
Total interest |
|---|---|---|---|
|
$35,000/9%. |
48 months. |
$871. |
$6,807. |
|
$35,000/10%. |
60 months. |
$744. |
$9,619. |
|
$35,000/11%. |
84 months. |
$599. |
$15,340. |
In this case, extending the term from 48 to 84 months and raising the interest rate by two percentage points results in an $8,500 increase in the total interest paid.
You have a higher risk of developing negative equity
Your chances of accruing negative equity, also known as being upside down or underwater on a car, increase with the amount of time you drive it and the miles you drive it. You may eventually come to owe more on your loan than the car is worth as the value of your car decreases.
In the event that an accident totals your car and it has negative equity, your insurance company will only cover the car’s market value. The difference between what you were paid for the car and the amount of your outstanding loan balance would still be your responsibility.
Compare rates from up to four lenders to find the best deal possible—free of fees, markups, or commitments.
You could fall into a cycle of negative equity
If you want to sell or trade in your car before your loan is paid off, negative equity may also be an issue. You will be responsible for the difference if the depreciation on your car has caused it to be worth less than the amount of your loan.
A dealership that is keen to move on to the next vehicle may occasionally recommend rolling the negative equity into your next auto loan. Thus, the $10,000 negative equity will be added to the amount you finance for your subsequent auto loan. You may decide to once more choose a long-term loan in order to maintain a low monthly payment due to the increased loan amount.
Some vehicle purchasers will repeatedly roll over negative equity into new loans. Every time, the loan grows larger and more challenging to repay.
Repair and maintenance costs increase with a car’s age
Most likely, a car that is 7 or 8 years old has more than 90,000 miles on it. This old of a vehicle will need new tires, brakes, and other maintenance. Unexpected repairs might also be necessary.
When an 84-month loan is taken out for a 3-year-old car, the car will have been owned for 10 years. You can also be responsible for high maintenance and repair expenses in addition to your monthly payment.
What if you already have a long auto loan term?
Even if you now wish you hadn’t chosen a 72-, 84-, or 96-month auto loan, you might still be able to steer clear of some drawbacks associated with such a lengthy loan.
Checking to see if you can refinance your auto loan to a shorter term is one option. In the event that your credit has improved since receiving the initial loan, you might also be eligible for a reduced interest rate.
An additional choice would be to repay the loan earlier than the agreed-upon term. This can entail making a monthly payment that is marginally higher than the minimum required and ensuring that the additional funds are used to reduce the principal balance of your loan. Additionally, if you have a lump sum of money—a tax return or a bonus from your job, for instance—you could pay off the principal on your loan in one big installment.
Asking about prepayment penalties is a good idea when paying off a car loan early, even though the majority of auto lenders no longer impose these fees.
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 should you keep a car loan?
The most typical duration is 72 months, or six years, and then 84 months. Your monthly payments will be smaller the longer your loan term, but the total interest rate will be higher. Conversely, shorter terms have higher monthly payments but result in a quicker car payoff and lower interest costs.
Is a 60-month car loan bad?
For those who wish to purchase a nice used car but may not have all the money to do so right now, 60-month auto loans are appealing options. It is definitely something to look for if you have a budget because five years is a long time to pay it off.
Read More :
https://www.nerdwallet.com/article/loans/auto-loans/5-reasons-say-no-long-car-loans
https://www.bankrate.com/loans/auto-loans/how-long-should-your-car-loan-be/