When you buy a car, most of the time, you’ll also need to take out a loan and make payments over an extended period. For many years, the standard car loan term for car buyers has been 60 months.
But as car prices continue to climb and 60-month term loan financing becomes more costly, people opt for even longer terms, including 72-month and even 84-month car loans.
While that makes monthly payments more affordable, and you can buy a nicer car, there are some downsides you must know about.
Pros and Cons of a 72-Month Vehicle Loan
Here are the good and the bad sides of a 72-month auto loan.
A longer term lowers your monthly car payments during the life of the loan. This is ideal if you run tight on your monthly budget or simply want more budget flexibility.
You can get a higher-priced used car or even a new car when you extend your loan to 72 months instead of taking out a 60-month loan. This can be an attractive plus if you’ve got a growing family and you need a bigger, newer, and safer ride for your loved ones.
If you get a salary bump or come into a lump sum of money, you can defeat the higher interest costs over time by paying off your vehicle early or adding a lump sum to a refinancing deal that saves you money.
You buy a higher quality vehicle with an established track record of minimal maintenance costs, holds its resale value, and is something you know you and your family will use for several years. Negative equity doesn’t impact you as much if you’ll keep the car after the loan term elapses.
You’ll pay a lot more for your car purchase because you’re making interest rate payments for a longer period. For example, if you take out a $25,000 auto loan with a 4.5% annual percentage rate, you’ll pay about $1,800 in interest for a 36-month loan. But when you take out a 72-month loan, the total interest you pay doubles to about $3,600.
Sometimes you’ll end up paying more than the car is worth with a long-term auto loan. With longer-term loans, it’s common for people to become upside down or underwater on the loan. New vehicles depreciate more quicker and lose much of their value in the first couple of years. The model and year you drive also mean that you could wind up with a vehicle with a depreciation rate that is faster than normal.
The longer you owe on the car, and the longer you own the vehicle, the more likely that you’ll wind up with more considerable maintenance costs. When you add those costs into a longer loan term, you could find your monthly outlay cumbersome 3-5 years down the road. Depending on the car you buy, your warranty could also go out of date while you’re still making payments, further adding to your headaches. With a shorter-term loan, you won’t need to make that calculation. The car should be paid off before the warranty expires and requires costly repairs and maintenance.
Most 72-month loan lengths generally have higher interest rates. Lenders know that borrowers who take out a longer loan are more likely to default, so the average interest rate is higher to cover the increased risk.
Suppose you’re planning on buying another car before the 72-month loan is paid off. Depending on your car’s condition and the demand for your make and model, you could sell this car during the loan for less than the outstanding balance, resulting in negative equity.
Money spent on loan payments is money you can’t use for other financial goals, such as saving for your children’s college or perhaps a down payment on a home.
You do your homework and find other less expensive cars that fit your needs. You can get the same low car payments by choosing a lower sticker price and simultaneously reducing your long-term interest payments.
Alternatives to a 72-Month Car Loan
Buy a used car that you can more readily afford. The less you spend and finance, the less you’ll pay monthly and long-term with used vehicles.
Lease a vehicle. This is an option that could produce lower monthly payments than auto financing while still putting you in a car you like. Lease contracts are usually only a few years long, giving you more short-term flexibility than being saddled with high ongoing payments.
Make a larger down payment. Simple economics dictate that when you put down more up front, you’ll finance less on the back end. You’ll also reduce the scenario of being underwater because you’ll start with some equity in the car. Consider tapping a credit card with a 0% introductory balance or finding a dealer who will give you the best value for a trade in as alternative financing optionsRefinance your vehicle loan for a shorter repayment period or a lower interest rate. You’ll have a better chance of refinancing if your credit scores are higher than when you took out your original loan, and you’ve resolved any blemishes on your credit reports. The terms and deals aren’t always in your favor, but often you can do better if you aggressively shop for better terms.