Is a long-term car loan worth it?

Buying a car is much more than choosing between buying an SUV or sedan in black or red.

If you buy a vehicle on loan, you also need to know the repayment terms that best suit your budget and financial goals. Car prices are still higher than they were before the COVID-19 pandemic. According to the Kelley Blue Book, the average price of a new car in December 2022 will be over $49,500, 5% higher than the same month a year ago and more than 20% higher than December 2020.

The longer the loan term (usually 24-84 months or 2-7 years), the cheaper the monthly payment. However, keep in mind that lower monthly payments have drawbacks, such as it can cost you more in the long run.

Reasons to avoid long-term car loans

Long-term car loans are attractive because they require lower monthly payments than short-term car loans. You can buy a more expensive car while making payments affordable, but long-term car loans can hurt you financially if you’re not careful.

Likely to turn upside down in a loan

The longer the loan term, the more likely it is that the loan will turn upside down at some point in the future. Favorable terms on auto loans mean you owe more than the car is worth. This is because the majority of the initial monthly payments on the loan go towards paying interest rather than principal.

Being upside down can be dangerous for several reasons. In the unlikely event that your car becomes a total loss in an accident, you may have to pay off the loan for the car you can no longer drive if your insurance doesn’t cover it.

Moreover, the longer the upside-down term of the car loan, the longer the negative capital. Trade-in a car with negative equity means you likely won’t have enough money to pay off your loan.

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vehicle depreciation

Cars depreciate the most in their first few years, so used car depreciation is less of an issue. Still, long-term car loans for used cars are usually not a good idea. A used car likely already has a significant amount of mileage, and a long-term car loan will add even more.

For example, the average American buys a 3-year-old car with 36,000 miles on it. If you have a six-year loan and drive 12,000 miles a year (US average), you will earn 72,000 miles. This means your car has 108,000 miles on it and he will be nearly 10 years old when it pays off. If you choose to trade it in right away, you may find that having no assets at all isn’t worth much, or worse, worthless.

higher interest

Longer terms usually come with much higher interest rates. This is generally because long-term loans are riskier for the lender. The longer the loan term, the more likely something will affect your financial situation before the loan is fully repaid.

Even if the interest rate on the long-term loan is the same as the interest rate on the short-term loan, you will be paying interest over a much longer period of time, thus paying more interest over the life of the loan.

A lower monthly payment may give your wallet some peace of mind, but the tradeoff may not be worth it.

This is an especially important consideration as the Federal Reserve continues to raise benchmark interest rates to combat pandemic-related inflation.

If the Federal Reserve raises its benchmark interest rate, it will raise the interest rates that private lenders offer on personal and auto loans. According to Experian, the average new loan interest rate for 2022 was 5.16% for him. However, interest rates ranged from 3.84% for borrowers with the highest credit scores to 12.93% for borrowers with the lowest or highest subprime scores.

stuck in the same vehicle

Before you sign off on a car loan of up to 84 months, make sure you’ve found the right car for your needs and consider whether you want to drive that same car for the entire term.

7 years is a very long time. Your needs and circumstances may change. But for long-term loans, you’ll be stuck with the same car. And in most cases, carrying forward a loan costs money.

Long Term Auto Loan Alternatives

There are other options for acquiring a car without agreeing to the risks involved with long-term car loans.

lease a vehicle

If you’re struggling to get a favorable loan approval, consider leasing your vehicle. Leasing rather than buying a car can make monthly payments more affordable. Even drivers with decent credit are likely to get lease approval and get behind the wheel of a fairly new car.

Be aware of the disadvantages of leasing. These include limits on how far the vehicle can be driven during the lease term and charges for excessive wear and tear. And, perhaps most importantly, you must either buy out the lease or return the car at the end of the lease.

Get a co-signer

A good credit co-signer gives potential lenders extra reassurance that you will pay off the loan. Become.

pay a large down payment

If your goal is to reduce your monthly costs, we recommend paying a high down payment. The more money you pay upfront, the less your monthly payments will be. You may also receive a more favorable interest rate from your lender.

Is a long-term car loan worth the risk?

Long-term car loans are often not recommended due to additional financial risks. While the low monthly payments on a long-term car loan may be tempting at first, you’re better off putting up a down payment or saving up extra cash to choose a cheaper car. .

Conclusion

Consider the downsides before signing a long-term car loan. In addition to costing more over the life of the loan, it can also be upside down with the loan. Additionally, after 5-7 years of paying off the loan, your vehicle needs may be different.

Consider long-term loan alternatives, such as paying a larger down payment, leasing a vehicle, or finding a co-signer whose credit score can help you get better loan terms.