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4 min read Published on January 30, 2023.
Writen by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ways and pitfalls of using loans to buy an automobile.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to manage their finances by providing clear, well-researched information that is broken down into complicated subjects into digestible pieces.
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A car purchase is far more than deciding to get an SUV or a sedan, in red or black. If you're buying the car with the help of a loan and you'll need decide on which repayment terms will make the most suitable for your financial and budget objectives. Prices for cars are still high compared to before the COVID-19 pandemic. The average price of a new vehicle for December of 2022 was more than $49,500 - five percent more than the previous month one year prior and over 20 percent more than December 2020 . The longer the loan period -- generally between 24 and , or two to seven years -- the cheaper your monthly payment will be. But remember, the lower your monthly payments have negatives, and could cost you more in the long term. For most people, a long-term car loan is not a wise choice. Reasons to avoid a long-term car loan Longer-term car loans are attractive because the monthly payments are less than those for the shorter-term loan. Though they allow you to purchase a higher-priced vehicle, they also make the payments affordable, long-term car loans could put you in a worse spot financially if you're not careful. It is more likely that you will end up upside down on loan An extended loan term means you are more likely to become upside down sometime in the near future. Being upside on a car loan is when you are owing more than the vehicle is worth. This is due to the fact that a larger portion of the monthly payment early in the loan will be used to pay interest rather than the principal due. A loan that is upside down could be risky for a variety of reasons. If you are involved in an accident that caused the car is deemed to be a total loss, you may end up paying off the loan on a car that is no longer able to drive, if insurance isn't covering the cost. In addition the longer you're upside-down on the car loan as well, the more time you're suffering from negative equity. Selling a car with negative equity is a sign that you will not have enough cash to pay off the loan and you may even need to take out. Depreciation of vehicles isn't a major issue with used cars since a during the initial few years. However, long-term car loans on used cars usually don't work. A car that is used likely has plenty of miles on it and a longer-term loan allows the miles to accumulate even more. As an example, suppose you buy a three-year-old car with 36,000 miles and that's the amount the average American will drive for this amount of time. If you take out a six-year loan and drive 12,000 miles a year, which is the standard in America, you would add 72,000 miles. That means your car has 108,000 miles, and will be nearing 10 years old by the time it's paid off. If you decide to sell it earlier, you may find it's not worth much or, worse, you don't have any equity whatsoever. The longer-term loans with higher interest typically are accompanied by higher rates . This is because longer loans are more risky for lenders. With a protracted loan period you are more at risk of things could impact your financial circumstances before the loan is paid back in full. Even if the interest rate of a long-term loan is similar to a shorter term however, you'll still have to have to pay more interest over the duration of the loan due to making interest payments over a much longer time. While your bank account may be relieved by the lower cost, the price may not be worth the cost. This is an especially important consideration as the Federal Reserve continues to to combat the issue of pandemic-related inflation. When the Fed increases benchmark rates, it increases interest rates offered by private lenders for personal loans as well as auto loans. The new average loan rate for 2022 was 5.16 percent . The rates varied from 3.84 percent to those having the best credit scores up to 12.93 percent for those with the lowest or most subprime scores. You're stuck with the same vehicle Before signing off on an auto loan which is as long as 84 months, be sure you've considered whether you'll want to use the same car throughout the duration. Seven years is a long time. Your needs and circumstances might change. But, with a long-term loan you'll be stuck with the same vehicle. Most of the time, rolling over the loan is costly. Alternatives to a long-term car loan There are many other ways to obtain a vehicle without agreeing to the risk associated with a long-term auto loan. Lease a vehicle If you are struggling to get an approval for an affordable loan You may be able to lease a car . Leasing can provide more affordable monthly payment. Even drivers with fair credit tend to be more likely to obtain an approval to lease and get behind the wheel of a fairly new vehicle. The negatives of leasing should be keep in mind. There are restrictions on how many miles you're allowed to drive throughout the lease and charges for excessive wear and wear. Most important most importantly, you'll be required to return or exchange the car at the lease's conclusion. Find a co-signer excellent credit rating provides prospective lenders with additional confidence that you will pay off the loan. This will make you more likely to be approved even if your credit score is not perfect. Make a high down payment If your goal is to cut down on your monthly expenses by making a large down payment amount down payment is a good alternative. The larger the amount you pay down at first and the more affordable the monthly cost will be. You are also likely to receive more favorable rate from the lender. Are long-term car loan worth the risk? A long-term car loan is often not an ideal option due to the risk of financial loss. While the lower monthly payments on a long-term car loan may be appealing initially, it's more beneficial to save additional cash to increase the down payment or to opt for a cheaper car, so the monthly payment is more affordable with a shorter loan. When you are deciding to sign to a long-term auto loan, consider the downsides. While it will cost your more in the loan's term, you may also end up becoming upside down on the loan . What's more, your vehicle requirements could change within 5 to 7 years, when you're still paying off that loan. Take a look at options for long-term loans like making a bigger down payment and leasing a car or finding a co-signer whose credit score can help you obtain better loan conditions.
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Writen by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ways and pitfalls of using loans to buy an automobile.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to take control of their finances by providing concise, well-studied facts that break down otherwise complicated topics into bite-sized pieces.
Auto loans editor
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