Purchasing a vehicle takes a lot more than just choosing whether to get an SUV or sedan in black or red. You must also determine how long you want your vehicle and, if you’re purchasing the vehicle with a loan, you’ll also have to determine the repayment terms you can afford.
The longer your loan term — typically ranging from 24 to 84 months, or two to seven years — the cheaper your monthly payments will be. But remember, a lower monthly payment doesn’t come without drawbacks, including potentially costing you more over the long term. For most drivers, a long-term car loan is not a good idea.
Reasons to avoid a long-term car loan
Longer-term car loans are attractive because the monthly payments will be smaller than those with a shorter-term car loan. Though they allow you to buy a more expensive car while still making the payment affordable, long-term car loans can place you in a worse spot financially if you’re not careful.
More likely to become upside down on the loan
A longer loan term means you are more likely to be upside down on the loan at some point in the future. Being upside on an auto loan means you owe more than the car is worth. This is because a larger portion of the monthly payments early in the loan will go toward paying interest rather than the principal owed.
Being upside down can be dangerous for several reasons. If you were to have a car accident where the car is considered a total loss, you could end up still having to pay off a loan on a car that you can no longer drive if insurance doesn’t cover it.
In addition, the longer you are upside down on the car loan, the longer you have negative equity. Trading in a car with negative equity means you likely won’t even get enough money to pay off the loan — you might even have to roll it into the next car loan you take out.
Even though depreciation is less of an issue with used cars, since a car depreciates the most in its first few years, long-term car loans on used cars usually aren’t a good idea, either. A used car likely already has a significant number of miles on it and a longer-term car loan would mean that the car will have even higher mileage when it is finally paid off.
For example, assume that you buy a three-year-old car with 36,000 miles on it, which is what the average American would drive in that length of time. If you take out a six-year loan and drive 12,000 miles annually, the average in America, you would add 72,000 miles. This would mean your car would have 108,000 miles on it and would be approaching 10 years old by the time it’s paid off. If you choose to trade it in sooner, you may find it’s not worth much, or worse, that you have no equity at all.
Longer-term lengths typically come with much higher interest rates — and even if the rate is the same as a shorter term, you will still pay more in interest over the life of the loan.
Although your wallet might feel relief in terms of the decreased monthly payment, don’t just consider that cost when deciding on the loan term. Making payments over the course of many years will cause interest to add up and can cost you quite a bit more out of pocket than a short-term loan option.
This is an especially important consideration as the Federal Reserve continues to regularly raise benchmark interest rates in order to address inflation incurred from the COVID-19 pandemic, among other factors. In 2022, as of July 21, the Federal Reserve has raised rates three times.
When the Fed raises benchmark rates it drives up interest rates private lenders offer for personal loans and auto loans. Rates for new car loans now range from a high of about 14.76 percent for those with a subpar credit score of 300 to 500 to 2.4 percent for those with the highest credit scores of 781 to 850.
Stuck with the same vehicle
Before signing off on a car loan that’s as long as 84 months consider if you will still want to drive the same vehicle throughout the entire term. Seven years is a very long time. Your needs and circumstances could shift, but with a long-term loan, you will be stuck with this vehicle. And in most cases, rolling over the loan will cost you money.
Alternatives to a long-term car loan
There are other options to get a vehicle without agreeing to the risk that comes along with a long-term car loan.
Lease a vehicle
If you are struggling to gain approval for a low-interest car loan with a shorter term you may consider leasing a vehicle. Even drivers with fair credit are more likely to receive approval for a lease and you can still get behind the wheel of a fairly new vehicle.
Get a co-signer
A co-signer provides potential lenders with an added layer of protection that you will pay off your loan. This makes you — even if you have poor credit — much more likely to receive approval.
Make a high down payment
If your goal is to lower your monthly costs, making a high down payment is a great option. The larger the amount that you put down initially the lower your monthly payment will be. Along with this, you are likely to receive more favorable rates from your lender.
Is a long-term car loan worth the risk?
A long-term car loan is often not a good idea because of the added financial risk. While the lower monthly payment on a long-term car loan may be appealing at first, it is better to save up some additional cash to increase the down payment or to select a less expensive car, so the monthly payment is affordable for a shorter loan.
The bottom line
Before signing onto a long-term auto loan, consider the downsides. In addition to costing you more out of pocket over the life of the loan, you may also end up being upside down on the loan at some point. What’s more, your vehicle needs may be far different five to seven years from now, when you’re still paying off that loan.
Consider the alternatives to long-term loans, such as making a bigger down payment, leasing a vehicle, or finding a co-signer whose credit score can help you obtain better loan terms.