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Reasons to Avoid Long-Term Auto Loans

Long-term auto loans offer lower monthly payments but can be costlier and riskier in the end

<p>IT Stock Free/Getty Images</p>

IT Stock Free/Getty Images

Fact checked by Betsy Petrick

The longest term available on auto loans today is typically 96 months, or eight years. While a longer term gives you lower monthly payments and more time to repay the loan, it also has downsides. The longer the term, the more you’ll pay in interest over time. In addition, you’ll risk having negative equity in the vehicle, which can be a problem if you want to trade it in or sell it or if you total it in an accident.

Key Takeaways

  • Long-term auto loans have smaller monthly payments but can significantly increase the total cost of the vehicle.
  • Lenders typically charge higher interest rates for long-term auto loans.
  • Long-term auto loans can result in negative equity, which means you owe more than the car is worth. That can be a problem if you want to trade in the car or sell it.
  • Maintenance and repair costs also rise as cars age, so you may be facing those bills along with your loan payments.

Reason 1: Higher Total Cost

A long-term loan can be an appealing option because it offers lower monthly payments. But you will likely be paying more over the lifespan of the loan due to accrued interest. The longer the loan term, the more interest you will pay in total.

Suppose you want to buy a $35,000 used car. You put down $7,000 and select a 72-month loan with an interest rate of 11.33% for the remaining $28,000. Your monthly payment will be $537.70. Over the lifespan of the loan, you will pay $38,714.32 total. Of that total, $10,714.32 will be interest.

What happens if you buy the same vehicle with the same down payment and interest rate but a 96-month loan? Your monthly payment will be $444.84, but you will pay $14,704.17 in interest by the time the loan is fully paid off. The total cost of the loan will be $42,704.17.

So, the 72-month loan would save you nearly $4,000 compared with the 96-month loan. An even shorter loan term would save you even more.


You can use an auto loan calculator to easily determine your monthly payments, interest payments, and overall loan cost with different loans.

Reason 2: Higher Interest Rates

In the example above we used the same interest rate for 96- and 72-month loans to keep the calculation simple. But the fact is that in most cases, lenders charge higher interest rates for longer-term auto loans because they consider them to be riskier. Borrowers have more time to default on the loan, and the value of the car, which typically serves as collateral for the loan, will depreciate further over longer periods.

Higher interest rates can significantly increase the amount you pay in total, so it’s worth shopping around. Here’s an example comparing two 96-month car loans:

$28,000 loan at 11%

  • Monthly payment: $439.84

  • Total interest paid: $14,224.25

  • Total paid: $42,224.25

$28,000 loan at 9%

  • Monthly payment: $410.21

  • Total interest paid: $11,379.75

  • Total paid: $39,379.75

Reason 3: Negative Equity

When you owe more on your loan than your car is worth, you have negative equity in the vehicle. Cars depreciate over time. The longer you spend repaying a loan, the more time your car has to lose value. Cars can lose 20% of their initial value in the first year following purchase and lose 60% within five years.

Negative equity can a problem for several reasons. If you want to sell your car before your loan term is over, you probably won’t get enough money for it to pay off the loan and will have to come up with cash from other sources. In addition, if your car is in a serious accident and totaled, the insurance company will typically pay you only its actual cash value, which can be less than you owe on the loan.

If you want to trade in your car, you may be able to roll the amount you still owe into a new car loan, but that will only increase your debt (and payments) on the new loan.

Reason 4: Limited Flexibility

Choosing a long-term auto loan likely means you will not have many, or any, options with very attractive interest rates.

Also, as mentioned, if you end up with negative equity, that can limit your options when it comes to selling or trading in your car.

Finally, if you want to get out of the loan early, your lender may charge prepayment penalties.

Reason 5: Maintenance and Repair Costs

Loan payments are not the only expense to consider when you purchase a car. You will also need to consider the cost of maintenance and repairs. The longer you hold onto your car, the more work—and the more expensive work—it may need.

For example, a car’s catalytic converter is typically expected to last for up to 10 years. However, if it is damaged or fails before that, you’re looking at a potential $1,000 to $3,000 repair bill.

In addition, any new car warranty you received when you bought the car may well have expired, with many ending after four or five years.

If you’re still making loan payments on the car while also paying repair bills, you could find yourself in a cash squeeze.

Alternatives to Long-Term Auto Loans

A long-term auto loan may be the right choice, but it’s worth weighing some alternatives.

Consider Shorter Loan Terms

Why are you considering a long-term auto loan? Is it the only way you can afford the monthly payments? Shop around for loans with various lenders and compare interest rates and loan terms. Calculate how much each option will cost in total.

You can get pre-approved for car loans and consider what the best car loan is for you before making a decision. You may find that a loan with shorter terms is doable.

You might also consider setting your sights on a less-expensive car so you don’t have to borrow as much.

Lease Instead of Buying

If affordable monthly payments are a priority, you can consider leasing a car. Leasing allows you to use a car in exchange for monthly payments. The down payment and monthly payments required for leasing could be smaller than the payments needed for a car loan. The downside of leasing, of course, is that you don’t accumulate any equity in the car and when the lease comes to an end you don’t own it.

Find a Co-Signer

If your credit score is impairing your ability to qualify for a favorable interest rate and loan term, you could explore the possibility of working with a co-signer, such as a relative or close friend. If a co-signer with strong credit applies for the car loan alongside you, you could be approved for a loan with a lower interest rate and better terms. This may make monthly payments on a shorter-term loan more affordable.

What Is the Average Length of a Car Loan?

The average length of a car loan today is about 72 months, or six years.

Are There Any Penalties for Paying Off an Auto Loan Early?

Some lenders charge prepayment penalties if you pay off your car loan early. These fees are usually calculated as a percentage of your loan amount.

What Is the Average Interest Rate on an Auto Loan?

The average APR on new car loans was recently 7.1%, while the average for used vehicles was 11.6%.

How Does My Credit Score Impact the Interest on an Auto Loan?

Borrowers with higher credit scores typically qualify for lower interest rates on auto loans. If you have only fair or poor credit, you may not be approved for an auto loan at many lenders, and if you are approved, you will likely face a higher interest rate.

Can I Refinance My Auto Loan?

Refinancing an auto loan is possible, and it can potentially lower your interest rate and monthly payments. But you’ll want to use a loan calculator to determine how much you’ll save. Also take into account any prepayment penalties on the old loan or added fees on the new one.

The Bottom Line

A long-term auto loan can be the right fit for some people. It offers the benefit of lower monthly payments but is likely to cost more in total over time. If you are planning to sell or trade the car in before you pay off the loan, consider the risk of negative equity. Generally speaking, it’s better to go for a shorter term if you can afford it.

Read the original article on Investopedia.