The trend for longer auto loans means some consumers can qualify for financing up to 96 months, or eight years, should they want it. The average loan term, meanwhile, stands at almost 69 months for new and 65 months for used vehicles, according to Experian data for the start of 2019. Rising auto prices and consumer preferences for large, costly SUVs have contributed to this pattern, and increasing the loan term is an effective way of getting an affordable monthly payment. However, while a low car payment is always appealing, it’s not always the best financial move. A longer loan will typically result in higher finance charges and a higher overall cost of purchase.
Consider someone who takes out a loan for $20,137 – the average amount for a used car says Experian – over 60 months with a six percent interest rate. Their monthly payment is $389 and they pay $3,221 in interest by the end of the contract. Extend the loan to 84 months and the car payment falls to $294, but the total interest charge is $4,573; an extra $1,352.
There are other reasons to be cautious about lengthy financing periods. Longer loans tend to have higher interest rates than shorter ones. There’s also the increased risk of negative equity, when you owe more than the vehicle is worth.
With an 84- or a 96-month loan, for example, you might still be making payments on an old high-mileage vehicle that’s fallen greatly in value. Taking into account the average length of new vehicle ownership is nearly seven years, you could find yourself changing cars without enjoying the benefits of debt-free driving, or face the hurdle of trading in while upside down.
Longer auto loans will have their place for some buyers, though, and may be the best option to get on the road in a much-needed vehicle. When it comes to your own financing needs, use RoadLoans’ auto loan calculator to estimate what length of loan may work, and how much you might be able to borrow for a car in total. Adjust the loan duration, interest rate and monthly payment to see how the suggested financing changes.
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*APR is the Annual Percentage Rate or the cost of your credit at a yearly rate.
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* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press), Bankrate.com, Credit.com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by RoadLoans.com and Santander Consumer USA.