When getting a car loan, there are many factors to consider. Credit union or dealership financing? Down payment or no down payment? Extended warranty or standard warranty? 60-month term, 72-month term or even an 84-month term?
Every decision you make during the auto loan process is important. As car prices increase, loan terms are getting longer to improve affordability. While the typical loan length is still around 60 months, many financing companies are now offering loans at 72 or 84 months - in some cases even higher.
Pros of a Longer Auto Loan
As auto-loan lengths extend further and further out, the question remains, is a longer-than-average loan a good idea for your lifestyle? Below we’ll review several instances why someone might consider a longer auto loan term.
Lower Monthly Payment
One of the primary benefits of a longer auto loan is your monthly payment will be lower than if you got a shorter term. The payment is lower because you are extending the amount of your loan over a longer period.
Here’s an example based on a $20,000 car with a $2,000 down payment and a 6% interest rate and a standard monthly payment for several loan terms from 36 months - 84 months.
• 36 Month: $547.59
• 48 Month: $422.73
• 60 Month: $347.99
• 72 Month: $298.31
• 84 Month: $262.95
As you can see, the shorter the loan term, the higher the monthly payment. The example above is designed to be simple to read, but we invite you to use our online loan calculator and plug in the numbers specific to your finances.
Having a lower monthly payment gives you some flexibility in your budget to allocate funds you would have spent on your car payment to other budget categories.
Qualify for a More Expensive Car
A lower monthly payment may qualify you for a more expensive car. This can mean a newer, more reliable automobile with fewer miles and more advanced features, but with a monthly payment you can afford.
You Plan to Keep the Car for Several Years
There are some buyers who plan to keep their car for 8 or even 10+ years. They typically don’t sell or trade in their car for a long time to come, so opting for a higher priced and higher quality vehicle while paying over several years make sense for them.
In many cases buyers have done their homework. While they know a 72 or 84-month loan can easily fit in their budget, they also know they can pay more when their budget allows without any penalty. In fact, many pay off their long-term auto loan earlier than planned, but enjoy having a lower monthly payment for the duration of the loan.
Cons of a Longer Auto Loan
You will enjoy a lower monthly payment, and can likely afford a nicer car with a 72 or 84-month auto loan; however, there are some downsides you should be aware of.
Pay More in Interest
With a longer auto loan term your payment will be lower, but you will also pay more in interest than if you chose a shorter term.
Here’s an example of the interest paid over the life of a loan using the same $20,000 car from the previous example:
• 36 Month: $1,713.42
• 48 Month: $2,291.07
• 60 Month: $2,879.43
• 72 Month: $3,478.36
• 84 Month: $4,088.13
You will pay over $1,000 more in interest by extending your loan from a typical 60-month term to an 84-month term.
Here is another tool you can use to compare auto financing terms which highlights how much is saved in interest based on various scenarios.
Get Upside Down On Your Loan
By the end of a long term loan, it isn’t uncommon to owe more on your vehicle than what it’s worth due to the constant depreciation. This is especially true if you pay low or no down payment during the purchase then opt for a 72 or 84-month loan.
If your car is in a major accident or you decide to sell or trade it in, being upside down on your loan means you pay the additional funds to settle with the lender - this can set you back even further.
Most new cars, and some used cars, come with a level of warranty protection typically from 3-5 years. If you keep a car for seven or more years, it likely has no warranty.
Vehicles age and costly repairs become more common over time; however, these repair bills can be easier to manage when your car is paid for. Repair bills can be harder to manage if you are still making your standard monthly loan payment.
Your Car Needs Might Change in 7 or 8 Years
A lot can happen in seven or eight years.The vehicle you purchase in 2019 might not be the car you still want or need in 2026. Maybe you have more kids, or your kids graduate and go to college. Perhaps you want to downsize or upgrade to a larger car. While it is easy to trade in or sell an auto, if you still owe on yours after several years it might be more difficult to get the trade-in value you expect or sell it for the profit you are looking for.
So, When You Should Get A 72 Or 84-Month Auto Loan?
While we generally don’t recommend a longer loan term, as noted earlier, there are times when it might fit your needs.
If you decide to opt for a longer term loan, look at your budget each month and see if you there are extra funds not earmarked for savings or paying down other debt. If so, try and pay extra on the principal balance of your loan. Even an extra $25 - $50 a month can really add up to pay off your loan faster.
Alternatives to a 72 or 84-Month Auto Loan
If you’ve decided a 60 month or lower auto loan is right for you, but you are not excited about the higher monthly payment there are some alternatives including:
Financing a Less Expensive Vehicle or ask about different models of the vehicle you have in mind. Think about what you really need. Can you live without the factory installed rear seat entertainment system or without leather seats? If so, opting for the same vehicle in a different model can save you thousands.
Waiting a Few Months to Buy - Do you really need a new vehicle now or can you wait a few months to save for a larger down payment or to pay down other debt in order to improve your credit score? The better your financial position the better position you will be in to get the lowest interest rate, and lower payment.
At Best Reward Credit Union, we want to help you finance a vehicle under the best terms for your needs. That’s why strive to save you money and stress throughout the process. Read more of our tips to auto buying or learn how to become a Best Reward Credit Union member.