Auto loans are getting longer and longer. Just a decade ago, a five year auto loan was unusually long; now, six and seven-year loans are becoming more popular, with nearly a quarter of all new loans using these new, longer terms. But while they’re tempting, they’re not for everybody, and customers should think carefully before they sign.
Long-Term Loans, Short-Term Thinking
Longer terms are popular because they cut down your overall monthly payment. Think of your loan term as a slice of your overall debt. If you cut $10,000 into 60 slices, as in a five-year loan, that’s a monthly payment of $167 a month before interest and fees. A six year loan would make that 72 slices, or $138 a month. And that’s as far as most customers go.
And it’s become more and more tempting in recent years. In some cases, it puts a new car within financial reach for those of us with tight budgets, which has become more important as the prices for new cars keep climbing. In fact, the average cost of a new car has broken records over the last several years. In other cases, it allows people to buy more car than they might otherwise be able to afford, especially if they want specific extras. And as the overall quality of cars has skyrocketed and cars last longer than ever, many consumers see it simply as taking the slow road for a car they plan to keep in the driveway for a decade or more.
But there are quite a few drawbacks to a long-term loan, and they’re not often considered by some consumers. When you sign up for a long-term loan, you’re essentially taking a gamble, in more ways than you might realize.
Among the issues that you can face with a long-term loan:
- You’ll pay more interest. Remember, every month you add to the term is one more month you’ll have to pay your interest rate on what’s left on the loan. In some cases, especially those with poor credit, this can add thousand of dollars to the overall cost of the loan.
- Your loan will extend past your warranty. If something breaks, the entire repair bill will be on you.
- The longer your car is on the road, and the more that you use it, the lower your trade-in value. Even a well-kept car is inevitably going to be worth less when you go to trade it in, the longer you keep it. You’ll need to keep a close eye on resale value.
- If you’re in an accident, you might find yourself with less money to buy a new car if it’s totalled. Remember, you’ll have to finish paying your loan out of your insurance payout, and that can leave you with less to replace your car.
- In the worst case scenario, the longer your loan goes, the more likely it is to go “upside-down.” This means that you owe more on the car than it’s actually worth, and you likely won’t be able to refinance.
So, if you need a car, think carefully before accepting a long term. The low monthly payment can be tempting, but it may not be worth it.