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4 min read Published January 30, 2023

Written by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ways and pitfalls of borrowing money to purchase a car.

Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to manage their finances by providing precise, well-studied information that breaks down otherwise complex topics into manageable bites.

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The process of buying a car is more than just deciding to buy an SUV or a sedan, in black or red. If you’re purchasing the vehicle through a loan, you’ll also have decide on what repayment terms make the most sense for your financial and budget goals. Prices for cars are still high compared to before the COVID-19 pandemic. The median price of a new vehicle for December of 2022 was more than $49,500, which is five percent more than the same month a year prior and over 20 percent more than December 2020 . The longer your loan duration — usually between 24 and , or between two and seven years, the less expensive your monthly payments will be. However, a lower monthly payment has drawbacks, including potentially costing you more over the course of time. For the majority of drivers, a long-term car loan is not a great idea. There are many reasons not to take out taking out a long-term loan longer-term car loans are attractive due to the fact that the monthly payments are less than those for the shorter-term loan. Though they allow you to purchase a higher-priced car , but still make the payments affordable, long-term car loans can put you in a more difficult spot financially when you’re not cautious. It is more likely that you will end up upside down on a loan A longer loan period means that you’re more likely to become upside down sometime in the future. Being upside down on an auto loan means that you are owing more than the vehicle is worth. This is due to the fact that a larger portion of the monthly payment beginning in the loan will be used to pay interest rather than the principal owed. Being upside down can be risky for a variety of reasons. If you are involved in a car accident where the vehicle is considered to be to be a total loss, you could end up still paying off a loan for a car you are unable to drive if insurance doesn’t cover it. Furthermore, the longer you are upside down on the car loan, the longer you have negative equity. The idea of trading in a car that has negative equity is a sign that you will not have enough cash to pay back the loan and you may be forced to take it out. Vehicle depreciation Depreciation isn’t a major issue for used vehicles in its first few years. However, long-term car loans on cars that are used don’t work. The car you are buying has an impressive amount of miles on it, and a longer-term car loan allows the miles to accumulate even more. Consider, for instance, that you buy a three-year-old car with 36,000 miles on it, which is what the typical American would drive in that length of time. If you took out a 6-year loan and travel 12,000 miles per year, which is the norm in America is 72,000 miles. That means your car has 108,000 miles on it and could be close to 10 years old when you pay it off. If you decide to trade it in sooner and you find that it’s worthless or, worse, you don’t have any equity at all. More interest Longer-term durations usually are accompanied by higher rates . This is due to the fact that longer loans are more risky for lenders. With a protracted loan term, there’s a greater chance you’ll be affected by a change in your financial situation prior to the loan is fully paid. Even when the interest rate of an extended loan is the same as a shorter term, you will still pay more in interest over the life of the loan due to making payments on interest over a much longer time. Although your pocket may be relieved by the lower cost, the price may not be worth it. This is an especially important consideration because the Federal Reserve continues to to tackle the issue of inflation caused by pandemics. When the Fed increases benchmark rates it raises interest rates offered by private lenders for personal loans and auto loans. The new average loan rate for 2022 was 5.16 percent . However, rates varied from 3.84 percent for those with the highest credit scores to 12.93 percent for borrowers with the lowest or deep subprime scores. You’re stuck with the same vehicle Prior to signing an auto loan that’s as long as 84 months, make sure you’ve considered whether you’d like to use the same car for the duration of the loan. Seven years is a long duration. Your requirements and needs could shift. But, with a long-term loan you’ll remain with the same vehicle. In most cases it is the case that extending the loan can cost you money. Alternatives to a lengthy car loan There are many other ways to obtain a vehicle without taking on the risk that comes along with a long-term auto loan. Lease a vehicle If you are struggling to get accepted for a favorable loan, you may . Leases can offer more affordable monthly installments. Even drivers with fair credit are more likely to get approval for a lease and drive an extremely new car. The disadvantages of leasing should be keep in mind. They have restrictions on how many miles you’re able to drive during the lease term and charges in excess wear and wear. Most important of all, you’ll need to return or exchange the vehicle when the lease comes to an expiration. Find a co-signer good credit score provides potential lenders with additional confidence that you’ll be able to pay the loan. This will make you more likely to be approved, even if your own credit is imperfect. Consider a large down payment If you want to reduce your monthly expenses, making a high down payment is an excellent alternative. The greater the amount you deposit initially, the lower your monthly payments will be. Additionally, you will be offered better interest rates with your lender. Are long-term car loan worth the risk? A long-term car loan is often not a good idea because of the risk of financial loss. Although the lower monthly cost for a long-term auto loan may be appealing at first, it is better to save up some additional cash to boost the amount of down payment, or opt for a cheaper car, so the monthly payment is more affordable with a shorter loan. The bottom line Before signing to a long-term auto loan take into consideration the disadvantages. Apart from costing you more over the loan’s term, you may also end in a position where you’re upside down on the loan . Furthermore, your car needs could be different in five to seven years when you’re still paying off that loan. Think about alternatives to long-term loans like paying a higher down and leasing a car or obtaining a co-signer with a credit score can help you obtain more favorable loan terms.


Writen by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the details of using loans to buy the car they want.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping readers gain confidence to control their finances with precise, well-researched and well-structured facts that break down otherwise complicated topics into bite-sized pieces.

Auto loans editor

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