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Is a long-term auto loan 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 you financial calculators and interactive tools that provide objective and original content. We also allow users to conduct research and compare data at no cost - so that you can make informed financial decisions. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this site are from companies that pay us. This compensation could affect how and where products are displayed on this website, for example, for example, the order in which they be listed within the categories of listing, except where prohibited by law. This applies to our loans, mortgages,, and other home lending products. However, this compensation will affect the content we publish or the reviews you see on this site. We do not cover the entire universe of businesses or financial deals that may be accessible to you.
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4 min read Read Published January 30, 2023
Writen by Rebecca Betterton Written 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 the car they want.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances with concise, well-researched and well-sourced information that breaks down complicated subjects into digestible pieces.
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Purchasing a vehicle takes far more than deciding to purchase an SUV or a sedan in red or black. If you're buying the car through a loan, you'll also have decide on which repayment terms make most fit for your financial and budget goals. Prices for cars are still high when compared to prior to that COVID-19 epidemic. The cost of a new car in December 2022 was more than $49,500 -- 5 percent more expensive than the same month one year earlier , and more than 20 percent more than December 2020 . The longer the loan period -- generally between 24 and , or between two and seven years -- the cheaper your monthly payments will be. But remember, a lower monthly payment has drawbacks, including potentially costing you more in the course of time. For most people that are in the long run, a long-term auto loan is not a wise idea. Reasons to avoid a long-term car loan Longer-term car loans are appealing because the monthly installments will be less than those for a shorter-term car loan. While they let you buy a larger car , but still make payments that are affordable, car loans can place you in a more difficult spot financially If you're not careful. It is more likely that you will end up upside down on a loan An extended loan period means that you're more likely to become upside down at some point in the near future. Being upside down on an auto loan means that you owe more than the car is worth. This is because a larger part of your monthly payments at the beginning of the loan will be spent on interest, rather than the principal owed. A loan that is upside down could be risky for a variety of reasons. If you are involved in an accident in which the vehicle is considered to be to be a total loss, you may end up needing to pay back a loan for a car you are unable to drive if insurance doesn't cover the cost. Additionally, the longer you are upside-down on the car loan as well, the more time you have negative equity. Trading in a car with negative equity could mean that you won't get enough money to pay back the loan and you may be forced to take it out. Vehicle depreciation is not a problem when it comes to used vehicles since during the initial few years. Even so, long-term car loans for used vehicles generally aren't the best idea. A used car likely already has a significant number of miles on it and a longer-term loan allows the miles to increase. As an example, suppose you purchase a car that is three years old that has 36,000 miles, which is what the average American would drive in that length of time. If you get a six-year loan and you drive 12,000 miles per year, which is the norm in America will be 72,000 miles. This means that your vehicle has 108,000 miles and would be approaching 10 years old by the time it's paid off. If you opt to trade it in sooner then you could find it's not worth much, or worse, that you don't have any equity at all. More interest Longer-term durations usually come with much higher . This is because longer loans are more risky for lenders. With a protracted loan duration it is more likely that you'll be affected by a change in your financial situation before the loan is paid back in full. Even when the interest rate for a long-term loan is similar to a shorter term but you'll have to pay more interest over the course of the loan because you will be paying interest for a longer time. While your bank account may be relieved from the reduced cost, the price may not be worth it. This is a particularly important factor to take into account since it is the case that Federal Reserve continues to to combat the issue of pandemic-related inflation. When the Fed raises benchmark rates, it increases interest rates offered by private lenders for personal loans and auto loans. The average new loan price for the year 2022 was 5.16 percent . However, rates ranged between 3.84 percent to those having the best credit scores, to 12.93 percent for those with the lowest or deep subprime scores. Stuck with the same vehicle Prior to signing a car loan that's as long as 84 months, be sure you've and consider whether you'll want to drive the same vehicle for the duration of the loan. Seven years is a very long duration. Your needs and circumstances could shift. However, with a longer-term loan, you will be stuck with the same vehicle. And in most cases, rolling over the loan will cost you money. Alternatives to a long-term vehicle loan There are other options to purchase a car without taking on the risk that comes along with a long-term auto loan. Rent a car If you're having trouble getting an approval for an acceptable loan, you may . leasing can help you pay lower monthly payment. Even those with good credit are more likely to receive the lease they want however, you are able to be driving an extremely new car. The disadvantages of leasing are important to remember. There are limitations on how far you're allowed to drive during the lease term and fees in excess wear and tear. And, perhaps most importantly of all, you'll need to either or return the vehicle at lease's conclusion. Find a co-signer excellent credit rating provides prospective lenders with additional assurance that you'll pay back your loan. This makes you more likely to receive approval, even if your own credit isn't perfect. Make a high down amount if you are looking to reduce your monthly expenses by making a large down payment is a great option. The larger the amount you put down initially, the lower your monthly payments will be. Additionally, you will be offered better rates from your lender. Is a long-term car loan worth the risk? A long-term auto loan is often not an option due to the increased risk to your finances. While the lower monthly payments on a long-term car loan might be attractive initially, it's best to save extra cash to make the down payment or to opt for a cheaper car to ensure that the monthly installment is affordable for a shorter loan. When you are deciding to sign to a long-term auto loan, consider the downsides. In addition to costing you more over the term of the loan it could also mean that you end in a position where you're upside down on the loan . Furthermore, your car needs could be different within five to seven years, when you're still paying back that loan. Consider the alternative to the long-term loans like having a larger down payment or leasing a vehicle, or securing a co-signer whose credit score will allow you to obtain more favorable loan conditions.
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Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the ways and pitfalls of borrowing money to purchase the car they want.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances with clear, well-researched data that breaks otherwise complicated topics into bite-sized pieces.
Auto loans editor
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