Should you steer away from long-term car loans?

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Ask a Lender
April 4, 2017 | Updated September 26, 2017


Key Points

Consider long-term auto loans carefully

  • The payments are low, but you'll likely pay more in interest.
  • You will build equity in the vehicle much more slowly.
  • You may end up owing more than the car is worth.
  • Leasing is a viable alternative if you need low monthly payments.

Getting an auto loan with a long term may seem like a good idea at first. These types of loans are getting more popular as the cost of vehicles continues to rise. According to a recent report from Experian Automotive, longer-term loans — defined as loans extending 73 to 84 months — grew in 2015 by 12 percent for new vehicles, and by 10.8 percent for used vehicles. Loans lasting 73 to 84 months equate to six to seven years, which is a long time to pay off a car loan.

A longer loan term results in a lower monthly payment. But by lengthening the loan term, you’re increasing the overall cost you’ll pay for the vehicle, and could even end up paying much more than the car is worth. It also will take longer for you to build equity in the car. Even though it may be difficult to make larger monthly payments, you’ll be building equity and will ultimately pay less interest.

Reasons for long-term auto loans

Why are more people taking out very long-term auto loans? It’s primarily because people are using them so they can afford more expensive cars.

It’s probably not a good idea to take out a longer-term loan just so you can afford a more expensive car. But there are some circumstances that might make the long-term loan a decent deal.

First, if you are able to secure a low interest rate, it might make up for the fact that you’ll pay more interest over the life of the loan.

Secondly, if you plan to drive the vehicle for a long time — say, more than 10 years — it might make sense to take out a long-term loan.

One of the main hazards of taking out a long-term loan is that when you go to trade it in for a new vehicle, you might owe more on the vehicle than it’s worth. This is called an “underwater” or “upside down” loan. If you don’t plan to trade the vehicle in for a long time, however, you can avoid this common hazard.

Lease a car as an alternative

Let’s say you’ve weighed the pros and cons of taking out a long-term loan, and you’ve decided it’s not right for your situation, but you still need to keep your monthly payment low. If the monthly payment is your primary concern, you may want to abandon the idea of taking out a loan altogether, and lease a vehicle instead.

Monthly payments on a lease are typically much lower than the payments on a loan. The drawback is that you won’t get to keep the car at the end of the lease period, but you also won’t have to worry about your long-term loan going under water.

Auto loans with very long terms are risky, but can be a viable option if you make sure to compare loan terms and put in the research and evaluate whether it’s right for your circumstances.

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