Long Term Auto Loans: Should I Avoid Them?
I am a serial entrepreneur and a consumer advocate. When I’m not helping car buyers, I love working on ventures that have a positive impact.
I run a cause marketing agency and serve on the board of Vayu Global Health where we are disrupting the medical industry and preventing the needless deaths of mothers and babies during childbirth.
If you are looking to purchase a vehicle, then chances are that you will get an auto loan.
However, how long should your car loan be? After all, you can get an auto loan for up to 84 months, but is it right for you?
Here, we will take a deeper look to see if they are worth it.
Table of Contents
- How Does a Car Loan Work?
- Examples of Auto Loans
- What Is Considered an Extended Car Loan?
- Pros: When a Long-Term Loan Is Right For You
- Cons: When Should You Avoid Long-Term Loans
- Are Long-Term Auto Loans Worth It?
- What Are Alternatives to an Extended Loan?
- Best 0% APR Deals by Category
- Frequently Asked Questions
How Does a Car Loan Work?
A car loan works much like many other types of loans. First, you will apply for a loan at either a financial institution or a car dealership. During the loan application process, you will have to submit information about your income and work history. From there, the lender will pull a “hard inquiry” from your credit report and make an assessment.
Based on a number of factors, you will either be approved or denied an auto loan. If you are approved for an auto loan, your interest rate and overall costs will depend on your credit score, income, and down payment.
Examples of Auto Loans
It’s a good idea to see how much an auto loan will cost on terms longer than 60 months. Here are some examples.
If you want to try some examples for yourself, check out this auto loan calculator.
Well-Qualified Buyer Loan
A well-qualified buyer has a credit score of 780. They can get a no-money-down 72-month loan at 3.11% on a $50,000 loan. Their monthly payment would be $762. The total amount of the loan would be $54,875. The buyer is paying $5,875 in interest.
High APR Loan
Let’s say the buyer has less than perfect credit. With a credit score of 670, the buyer could secure a $40,000 car loan with $8,000 down. The APR rate on an 82-month loan is 6.25%. The monthly payments amount to $601. The total cost of the payments is $49,250, with the buyer paying $9,250 in interest.
What Is Considered an Extended Car Loan?
Long-term auto loans are loans that are longer than 60-months. Today, it is not uncommon to find auto loans that are 72 months or 84 months in length. In fact, many car loans now range from the 60-month to the 84-month range.
Pros: When a Long-Term Loan Is Right For You
There may be times when a long-term loan is right for you. Here’s a look at the circumstances when you will want to consider an auto loan that is longer than 60 months:
1. You Want Lower Monthly Payments
If you want lower monthly payments, stretching out your loan as much as possible will help you keep your monthly payments down.
2. You Are Purchasing a Vehicle Known for Reliability
A 72-month or 84-month loan means that you will be paying for the vehicle for 6 or 7 years. Therefore, you will want to make sure that you purchase a car, truck, or SUV with a reputation for reliability.
3. The Vehicle Has a Strong Resale Value
Also, it makes sense to use a long-term auto long on a vehicle that will maintain its resale value after five or six years. This will help you when it comes time to trade-in for a new vehicle.
4. You Will Own the Vehicle for a Long Period Time
If you intend to make up to seven years of payments, then you should intend to own the vehicle for a long time.
Cons: When Should You Avoid Long-Term Loans
There are some cases where you don’t want to make long-term payments on a vehicle. Here are some cases where long-term auto loans don’t make sense.
1. You Don’t Want to Own the Car for a Long Period of Time
If you don’t see yourself own a vehicle for more than six years, then you should not take out a 72-month to 84-month auto loan on the vehicle.
2. You Purchase a Car With Fast Depreciation
Some vehicles can depreciate by over 50% after three or four years. If you have a 72-month or 84-month auto loan on these vehicles, you can still be “upside down” on the vehicle after four years. That means that you will owe more than what the vehicle is worth.
3. You Don’t Mind Making Higher Monthly Payments
If you have the money to make higher monthly payments, then you should get a shorter auto loan. A shorter auto loan term will allow you to save on the interest rates costs, and you can own your vehicle outright faster.
Are Long-Term Auto Loans Worth It?
A long-term auto loan may be worth it if you are purchasing a vehicle with a reputation for long-term reliability. For instance, vehicles from Toyota, Lexus, and Honda may be ideal for long-term loans.
However, vehicles with high depreciation and less reliability are poor candidates for long-term reliability. For instance, you may want to avoid long-term auto loans on many luxury and high-performance vehicles.
What Are Alternatives to an Extended Loan?
If you don’t want to deal with an extended loan, then you should consider the following alternatives.
1. Purchase a Lower Cost Vehicle
If you purchase a lower-cost vehicle, then it is possible to shorten the number of payments that you would have to make.
2. Make a Higher Down Payment
Another way to avoid extended loans is to make a higher down payment. Most down payments on vehicles are about 10%. Therefore, you should aim for a 15% to 20% down payment.
3. Leasing
If you don’t want to make 82-month payments but you still want to drive a new vehicle, then you may want to consider a lease. With a lease, you only pay for the time that you drive the vehicle.
