If you’ve had sticker shock when you’ve priced new and used cars, you’re not alone. Cars, trucks, and SUVs are more expensive than ever. About 85% of new car buyers take out auto loans to pay for their new rides, and the length of those loans continues to grow. Around 55% of used car purchases require financing, and those loans are getting longer as well.
According to the Experian credit bureau, the average new car loan currently lasts about 69 months, while the average used car loan spans about 65 months. About a third of new car loans and around 19% of used car loans are longer than six years.
Taking advantage of a car loan that lasts 72 months or longer has a few benefits. Still, the problems consumers can face vastly outweigh the positives. In short, if you can't afford to buy a car with a five-year (60-month) car loan, you should probably reconsider your purchase or look for ways to shorten the term.
In this article, we’ll show you why 72-month, 84-month, and longer-term car loans are horrible ways to buy a car.
Topics we’ll explore:
- What Is a Long-Term Auto Loan?
- Benefits of 72-Month and 84-Month Auto Loans
- Problems With 72-Month and 84-Month Auto Loans
- Avoiding a Long-Term Auto Loan
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What Is a Long-Term Auto Loan?
How long is too long for a car loan? Many experts believe that once an auto loan passes five years (60 months), the benefits of the longer term are outweighed by potential problems, so that means any loan that lasts for more than five years would be a long-term auto loan.
Despite the downsides involved with these lengthy loans, will you still find lenders willing to give you 72-month, 84-month, and even longer loans? Yes, due to competitive pressure and differing underwriting standards, you can find lenders who will stretch your extreme lengths to get your business.
Any loan that exceeds the length of your car's warranty coverage is potentially too long. It exposes you to having to make car payments and pay for costly repairs at the same time.
Avoiding a long-term auto loan requires consumers to understand all the aspects of a car deal. It is critical buyers avoid the temptation only to consider the monthly payment. Instead, they need to look at the total cost of the car, including its financing. Car dealers will happily bury you in a long-term car loan so they can sell you a more expensive model or package expensive add-ons into the deal. Lenders charge a higher interest rate on longer car loans. That's why some lenders encourage you to take out a longer loan, which makes them more profit as you pay back the financing.
Benefits of 72-Month and 84-Month Auto Loans
There's really only one benefit of a long-term auto loan that spans six to seven years or even longer. The longer the car loan, the smaller the monthly payment. By taking out financing with an extended loan term, you can potentially buy a more expensive car and still stay within your monthly budget. It’s a horrible way to buy a car, but many people take the risk and do it.
Let’s use the U.S. News Car Loan Calculator to show an example. The average new car loan is about $32,500, according to Experian, and we’ll use that number for our calculation. We’ll assume you don’t have a trade-in or down payment.
If you finance $32,500 for five years (60 months) at the current average interest rate of 4.59%, your monthly payments are $607. Over the course of the loan, you’ll pay $3,934 in interest.
That’s a pretty steep monthly payment, so let’s see what happens if we stretch the loan out to six years (72 months). Because there’s more risk to the lender, you’ll have to pay a higher interest rate. The current average is 4.63%. Plug the $32,500 loan amount, the interest rate, and the 72-month length of the loan into our auto loan calculator, and it shows a monthly payment of $518. That seems much more affordable until you look at how much interest you would pay over the course of the loan. According to the calculator, your total interest would be $4,785. That's about $850 extra you would pay to stretch your car loan by a year.
More and more car loans are being written for 84 months. We’ll assume you’ll pay an even larger interest rate premium due to the length of the loan. We’ll say it's 5% for this seven-year loan. Your car payments drop to $459, but you have to pay a whopping $6,086 in interest on the loan.
In other words, the primary benefit of a longer auto loan isn't an advantage at all when you look at the total cost of the loan. When you have any financing offer from a dealership or a lender, it's vital that you run the numbers yourself to see both the monthly payment and the total cost of the financing. If you leave it to the dealer, they're liable to only show you the payment and gloss over the downside of taking out such a long loan.
Problems With 72-Month and 84-Month Auto Loans
When you just look at monthly payments, longer-term loans look like a good deal. As you witnessed in the last section, the dream of a low-cost loan becomes a nightmare when you look at the total cost. There are even more issues with long car loans that make them a horrible way to buy a car.
The Longer the Loan, the Higher the Interest Rate
When lenders compute interest rates, they look at several factors. History shows them that the longer the loan, the less likely the borrower will make all of the payments and ultimately pay off the car. Lenders price that added risk into the loan by increasing its interest rate.
Buyers with prime or super prime credit may not notice much of a difference in rates as they stretch their loans out. Those buyers with poor or subprime credit will likely see a much higher penalty for going with a longer auto loan. That premium will be on top of an already higher rate driven by their poor credit. Buyers with terrible credit may not qualify for 72-month car loans or longer financing. If you have horrible credit and find a lender who will make you an 84-month auto loan, you’ve probably found a lender who does not have your best interests at heart. They are trying to make a lot of money off you before they repossess your car.
The Total Amount You Pay in Interest Will Be Higher
As we illustrated in the earlier section, the longer the loan, the more interest you will pay in the long run. While your monthly payments will be lower, you’ll pay a higher interest rate, and you’ll pay it for a longer time.
There are a couple of ways to find the total cost of a car, including its financing. Some auto loan calculators, including the one on our site, display the total amount of interest you'll pay over the term of the loan. Add that number to the vehicle's initial price, and you'll have the total cost.
From our previous example, the calculator shows you would pay $4,785 in interest. Add that to the $32,500 cost of our new SUV, and it shows you would pay a total of $37,285.
Another, sometimes easier, way to figure the total cost is to multiply the monthly payment by the number of months in the auto loan, then add your down payment and the value of your trade-in. From our previous 72-month car loan example, you would multiply its $518 monthly payment by 72 to find a total cost of $37,296. The results of the two methods should be reasonably close to one another, though rounding error may cause a bit of difference.
It’s Easy to Go Underwater
When it comes to auto lending, the term underwater means that you owe more than your vehicle is worth. If your car is declared a total loss or it is stolen, the amount you’ll get back from your auto insurance company won’t cover the balance of your loan. Even if you sell it yourself, you’d be unlikely to get enough cash to pay off your financing. The situation is also known as having negative equity or being upside-down on your auto loan.
Borrowers who have a reasonable amount of negative equity, make all of their payments on time, don’t plan to sell their car, and have a gap insurance policy in place that will cover the difference between the value of their vehicle and their loan balance don't really have too much to worry about from negative equity. If something happens, the insurance company will use the gap insurance coverage to make up the difference in values.
Unfortunately, many consumers who have negative equity can't bridge the divide between their loan balance and the value of their car. If you have an emergency that forces you to sell your car, or it is stolen or totaled, you can be in a situation where you have no car, but still owe the bank a tidy sum of cash. They can demand you pay the money back immediately because you no longer have the collateral that backed the loan (your car).
Whenever you have a car loan, there's the potential to be underwater. Take out a long car loan, and having negative equity moves from being a possibility to an almost certainty.
Here’s why: New cars depreciate rapidly during their first couple of years on the road. Used cars also depreciate, but not at the same rate as a new car early in its life. According to experts, a car can lose 10% of its value the moment you drive it off the dealer’s lot and 20% by the time it has its first birthday. It will likely lose another 10% each year for the next few years before the depreciation starts to level off. All cars depreciate at different speeds. How you drive, how many miles you spend behind the wheel, and how you care for the vehicle can increase or decrease the pace of its value decline.
Loan balances, on the other hand, decline very slowly in the early years of a loan. Much of each early monthly loan payment goes to paying interest, with little going to pay down the balance of the loan. That shifts over time, but in the first years, you don't make much progress in reducing the amount of the car loan. The longer the car loan, the more money goes to interest in the early years of the loan, and the slower the loan balance declines.
Though most borrowers never look at it, every car loan comes with a table called an amortization schedule. It shows the split between principal and interest for every month of the loan. Some online car payment calculators offer an amortization schedule, while others just show the monthly payment.
To illustrate how much slower borrowers pay down interest with a long-term car loan, we'll use our first example again. The 60-month loan a 4.59% creates a monthly car payment of $617. When the first payment is made, $483 goes to paying down the loan, while $124 goes to interest.
Stretch the loan to 72 months (six years), and the payment drops to $518 per month. But when the first payment is made, only $392 goes to principal, and $125 goes toward interest. If our $32,500 SUV loses 20%, or $6,500, of its value in the first year, the six-year loan will put you much further underwater than the five-year loan.
In the pursuit of staying above-water on the loan, you want every possible dollar to go toward the principal. Taking out a 72-month loan or one that’s even longer sabotages your ability to do that. If you’re already underwater on your current loan, read our article on getting out of an underwater loan before you ever consider getting a new loan.
It’s Hard to Break the Cycle of Long-Term Loans
Unless you completely pay off your 72- or 84-month car loan before you buy another new or pre-owned car, you’re likely to be stuck in a cycle of long-term financing. Unfortunately, your second or later long-term loans can be even more perilous than your first 72-month or longer loan.
Here’s an example of what often happens. You’ve had the car for about five years when you’re tired of it, or it no longer meets your needs. Instead of hanging onto it until its six- or seven-year loan is paid-off, you follow a dealer’s advertisement that promises to pay off your existing loan.
Well, sure, they pay off your old loan, but they do so by getting you a new loan that has your prior balance tacked onto the top. Depending on how much you owe, you can end up with a new loan that’s 110% to 150% of the value of your new car. Before you ever leave the dealer, you’re deeply underwater on your car loan.
It’s unlikely that you’ll be able to get decent payments on that amount with a four- or five-year car loan. Instead, you’ll end up with a loan that’s as long or longer than your old loan. You’ll, in essence, be paying for two cars, while only one is in your garage. In short, adding the balance of your old long-term car loan to the loan on another vehicle is taking a poor decision and turning it into a financially irresponsible one.
Even if you held out and paid off your existing 72-month loan before diving back into the market, it may be hard to buy a new car with a shorter loan than your first one. As the car ages and its warranty expires, there’s likely more money put into repairs, rather than into the bank for a down payment on your next ride.
You’ll Have Car Payments, Plus Repair Costs
The longer your car loan exceeds the length of your warranty, the more exposed you are to financial stress if something goes wrong or you hit an expensive maintenance interval.
Unless you purchase a car with a long factory powertrain warranty, such as a Kia or Hyundai, your warranty coverage will be long gone before you pay off your auto loan. With short car loans, you’ll have the last payments made before your aging car begins needing expensive repairs. If your loan is long, the chance that you’ll have to both make a payment and pay for a costly repair bill at the same time is much higher.
Even if the car you are buying has an exceptional predicted reliability rating, older cars frequently require some expensive routine maintenance as they age. If you are forced to pay for repairs or maintenance on a high-interest rate credit card, it can take years to pay off the balance.
Avoiding a Long-Term Auto Loan
There are plenty of ways to avoid the trap of a 72-month or 84-month (or longer) auto loan. Some take a bit of sacrifice, but others just take some research and legwork. The money you can save is worth the extra effort in the long run. Even if you’ve already agreed to a long auto loan, there are ways to get out from under the mistake.
Get Preapproved Financing
Instead of waiting until you're in the dealership's finance office, you should get a preapproved loan from a bank, credit union, or another lender. Getting your financing arranged ahead of time offers several advantages. Most importantly, having an offer in place gives the dealer's finance officer a deal they have to beat to get your business.
The vast majority of car buyers arrange their financing through the dealership at the same time as they buy their car. Unfortunately, that's a great way to get a lousy deal on both the vehicle and the auto loan. When buyers fail to separate their price negotiations from their financing and their trade-in, they open themselves up to a confusing shell game. Dealers make a portion of their profit by marking up the interest rate on new and used car financing. If you avoid the markup, you may be able to afford a shorter loan.
By working ahead on your financing, you’ll be able to get a good idea of the types of loans you qualify for. You can learn your credit score and identify any issues or errors on your credit report. The last place you want to be when you learn about credit problems is in a dealer’s finance office.
Our guide to financing and getting a car loan takes you through the steps of getting a preapproved offer.
Be Careful at the Dealership
It's easy to let yourself get locked into a long-term auto loan if you don't pay careful attention at the dealership. Professional car salespeople are well-trained in incrementally moving buyers into the deal that makes them the most money. That's their job, and as long as they do so legally and ethically, it's OK. One of their most successful tactics is to keep buyers focused on the monthly payment. It allows them to move money around in the background to make it appear you're getting a great deal.
You can avoid falling into the trap by having a preapproved auto loan with terms that are agreeable to you and by carefully checking all of the documents the salesperson puts in front of you. It's a good idea to have a smartphone with a car payment calculator with you so you can check the numbers and ensure that they make sense.
If the monthly payment looks too good to be true or you can suddenly afford more car than you thought you could, it’s probably because the salesperson is going to set up a 72-month or longer auto loan term.
It’s easy to get excited about your new car and rush through the sales paperwork. You must take your time and read each document. Make sure the forms are accurate, complete, and match the deal you agreed to. Never sign paperwork that is incorrect or incomplete. It's much easier to argue about an error when the document doesn't have your signature on the bottom.
Beware of Yo-Yo Financing
Be sure the lender has approved your loan before you drive off the lot. If the deal isn't finalized with the lender or is a tentative approval, you're open to something called the spot financing scam (or yo-yo financing). It's where you get a call a week or two after leaving the dealer, saying that your financing was not approved, and you need to return to sign new paperwork. When you do, you find the new deal is much more expensive than the original agreement. They figure you're so attached to the new car that you won't want to unwind the deal. However, that's precisely what you should do.
Instead of going straight back to the dealer, you should instead shop for a new loan from a local credit union or bank. If you can get an offer similar to your original deal, take it back to the dealer. If you can’t, you should return the car to the dealership rather than let them stick you with a loan you can’t afford.
Purchase a Less Expensive Car
If you can't afford to buy a car with a five-year or shorter loan, you should really think about whether you can afford the car in the first place. It sounds obvious, but the easiest way to get a shorter car loan is to get a less expensive vehicle. If you need an 84-month car loan to buy the latest and greatest pickup truck, you should be looking for a cheaper model or a used car that's a few years old.
By using a service such as the U.S. News Best Price Program, you can get significant savings off the sticker price of a new vehicle. Save enough, and you can shorten your financing to a reasonable loan term.
In some cases, you can opt for a lower trim level than you originally wanted or a certified pre-owned car, which still has factory warranty coverage. With a high-quality used car, the original owner will have taken the massive depreciation hit, leaving you with an affordable option. Our guide to buying a used car shows you how to find and purchase the right used car for your needs.
Save Money With a Certified Pre-Owned Car
Factory certified pre-owned cars (CPO cars) are gently used cars that typically have relatively few miles, have additional warranty coverage, and are inspected and refurbished by the dealer. You can only get factory-certified pre-owned vehicles from franchised dealerships of the car's brand. They’re frequently vehicles returned at the end of lease contracts and are a couple of model years old.
While CPO vehicles have higher price tags than other used cars, they’re much less expensive than similar new cars. That lower price tag can allow you to get a much shorter loan than you would need on a new vehicle.
Though the details vary with the brand you choose, a CPO car will typically come with factory warranty coverage. Many come with other extras, such as roadside assistance, trip-interruption coverage, and loaner vehicles for when your vehicle is in the shop. Many financial institutions treat CPO cars like new cars and offer better car loan rates and terms than you find on non-CPO cars.
Make a Bigger Down Payment
Paying more cash upfront is a great way to avoid a 72-month car loan (or longer). Every dollar added to your down payment is one less dollar you have to borrow and pay interest on. While it’s not a good idea to raid your retirement accounts or emergency fund, making a substantial down payment has benefits beyond getting you a shorter-term loan.
Financial institutions and other lenders love seeing a car purchase with a low starting loan-to-value, or LTV, ratio. When you owe less than the car is worth, there’s less risk for both you and the lender. Since there’s less risk, you’re more likely to qualify for great rates. Even if you have bad credit, applying for a loan with a low LTV ratio can make the loan process go easier.
A great way to save up for a sizable down payment is to make car payments to yourself for at least a few months before you buy a car. You start by using an auto loan calculator to figure out what an average payment would be on the vehicle you want, given your credit rating, and an appropriate loan length. Instead of paying that money to the bank, you stash it away in a special fund that you don't touch. Not only does this method help you save money, but it also lets you know if the payment fits comfortably into your monthly budget. If the amount stretches your monthly finances, it's time to look for a cheaper car.
Look for a Car Deal
When cars aren't selling, or they're nearing the end of a product cycle, automakers frequently offer money-saving incentives to boost the sales pace. Take advantage of one of these car deals, and you can save enough money to get a shorter-term loan. The best part about car deals is they come straight from the automaker, and you don’t have to negotiate with a car dealer to get them.
A cash back deal effectively lowers the price of the car, truck, or SUV you're buying. Cash back offers go by several names – rebates, bonus cash, and others. No matter what they're called, they can save you enough money to allow you to have a smaller loan amount and shorter loan term.
Financing deals lower the interest rate on your car loan to lower-than-market rates. While any deal that substantially reduces the interest rate on your loan is a good deal, the best deals are zero-percent offers. A zero-percent interest offer eliminates any interest payments on the auto financing. While we still don’t recommend long loan terms, a 72-month zero-percent loan is not as potentially financially destructive as a long loan with a high interest rate.
You can find the best cash back and financing deals available in the marketplace on our new car deals page. Shoppers considering a certified used car should check out our used car deals page to see this month's best used car financing offers.
In order to take advantage of a special car deal, automakers and their finance arms require you to have excellent credit. In most cases, car deals are reserved for buyers with top-notch credit scores, though it doesn’t hurt to ask your car dealer if you qualify.
Build Your Credit Score
If you need a car tomorrow, this section won’t help you. If, on the other hand, you have some time before you buy, improving your credit score can lower the interest rate on your loan enough that you can shorten its term.
The first step in improving your score is finding out what it is. Many credit card companies will provide your score as a benefit of being a cardholder. Consumers who don’t have that benefit can visit sites such as CreditKarma.com, which provide access to your score. Just beware of sites that require you to sign up for services before you can see your score or credit report. There are plenty of free options, so you should never have to pay to view your score.
A credit score is a three-digit number between 300 and 850 that summarizes the information in your credit report. You’re entitled to a free copy of your credit report from each of the three major credit reporting bureaus – Experian, TransUnion, and Equifax – each year. To get your reports, visit AnnualCreditReport.com, which is the only authorized source of the federally mandated free reports.
When you get your score and reports, scan them to look for errors and places where you can improve. An excellent way to quickly boost your score is by paying your bills on time every month. Beyond paying on time, another way to boost your score is by paying down accounts with high balances. To be most effective, pay the minimum payment on all of your credit cards except for the one with the highest interest rate. On that account, you want to pay down the balance as quickly as possible.
Most credit scores don't reflect payments on utilities and cell phone accounts. Experian is offering a free service called Experian Boost that does take those payments into account when determining a credit score. It's an excellent plan for younger consumers who don't have much credit history but pay all of their bills on time.
Find Affordable Lenders
Buyers who want affordable financing deals should shop for them well before visiting an auto dealership. While a dealer may be able to find you a great financing deal, you can probably save some money if you avoid their markup and work directly with a lender to get a preapproval.
You should start your search for financing at the financial institution where you do most of your business. They may have discounts for customers who take advantage of more than one of their services. They may also offer automatic monthly transfers, which means you’ll never miss a payment.
Certain lenders have a reputation for having competitive rates. Credit unions, community banks, and online lenders often beat large national banks. You're also more likely to find a personal touch at a credit union or smaller community bank. As member-owned co-ops, credit unions differ from other lenders. Instead of providing stockholders with dividends, they return their excess revenue to their members in the form of lower loan interest rates and higher savings rates.
Remember, a car dealer and an outside lender have different goals. For a dealer, getting you the largest loan possible is their path to selling you an expensive car and add-on products. For a lender, the primary consideration is making you a loan that they’re near-certain will be paid back. To keep your payments affordable, the dealer is more likely to suggest an 84-month car loan than an outside lender would.
APR Range: 1.99% - 27%
Loan Term: 24 - 84 months
Loan Range: $8,000 - $100,000
At least 18 years old, resident of the U.S. (except Alaska and Hawaii), with min. income of $1,800/month and min. credit score of 500
Max mileage of 125,000 miles, 10 years old or newer
myAutoloan presents up to four offers from a variety of participating lenders based on your specific loan requirements, offering a wide variety of choice and selections.
APR Range: 3.34% - 17.49% (AutoPay Discount of 0.50% also included)
Loan Term: 24 - 144 months
Loan Range: $5,000 - $100,000
Must have good to excellent credit*
LightStream caters heavily to applicants with very strong credit scores, offering a streamlined application process and a Rate Beat program that guarantees they'll beat any other qualifying offers an applicant receives.
APR Range: 3.99% - 10.08%
Loan Term: 36 - 72 months
Loan Range: $4,000+
$1,800/month minimum income requirements, resident of the U.S. (except Alaska or Hawaii)
Limited to vehicles available through the Capital One network of dealers
Capital One offers a pre-qualification, which allows you to take your offer to any participating dealer within 30 days.
APR Range: 4.29% - 24.99%
Loan Term: 48 - 72 months
Loan Range: $4,000+
At least 18 years old
Limited to vehicles available through the Chase network of dealers, no older than 2008
After your application is approved, Chase will send the information to the dealer you choose. The offer is good for 30 days.
|Bank of America|
APR Range: 3.49+%
Loan Term: 12 - 75 months
Loan Range: $7,500 - $100,000
At least 18 years old (19 in Alabama or Nebraska) U.S. resident
Max mileage of 125,000 miles, 10 years old or newer, valued at $6,000+, plus additional restrictions
Bank of America Preferred Rewards clients can receive an interest rate discount of 0.25-0.50% depending on their tier at the time of applying for an auto loan.
Disclaimer: All information provided here is based on Annual Percentage Rate estimates from the websites of the individual lenders on 12/18/2018. It is not a binding or guaranteed loan offer. Individual auto loan rates will vary.
Notes: In compiling this data, we used new-car purchase rates for Virginia.
*To meet LightStream's standard for good credit, you must have several years of credit history with a variety of account types, including credit cards, installment debt (vehicle loans), and mortgages. LightStream also prefers to see few, if any, delinquencies and a history of savings, evidenced by things like deposit accounts and manageable revolving credit card debt. You'll also want to provide proof of stable and sufficient income to repay current debt obligations as well as any new loan with LightStream.
Consider Leasing a Vehicle
If your sole reason for getting a long loan is reducing the monthly payment to an affordable number, you might consider leasing a new car. Because you only pay for the expected amount of depreciation during the course of the lease, plus interest and fees, your payments are typically lower than they would be on a car loan.
Leasing puts you behind the wheel of a vehicle with the latest features, such as advanced safety technology, infotainment, and connectivity. At the end of the lease, you simply return the vehicle to the dealership and lease your next car. Of course, it's a bit more complicated than that, and leasing also has its weaknesses. Our guide to leasing versus buying looks at the differences between the two options.
At a growing number of dealerships, you can lease certified used cars. It’s not common, but you can save a ton of cash if you can find a dealer that’s willing to do so. Read more about taking advantage of this option in our story about used car leasing.
Refinance to Shorten Your Loan Term
What if you’ve already taken out a 72-month loan or longer financing? Are you stuck with it for the entire term of the loan? Fortunately, in most cases, you can refinance your auto loan to shorten its term.
It’s an especially good idea to refinance if your credit has substantially improved or if your income has risen and you can afford to pay off your car more quickly. After a couple of years of paying on time, your loan amount, and hopefully, your LTV will be lower, making your financing more attractive to lenders.
According to the TransUnion credit bureau, borrowers who refinance their auto loan reduce their interest rate by an average of 2.4%. Credit unions are the market leaders in loan refinancing, TransUnion reports.
Many lenders have special auto loan refinance programs. They offer no-hassle ways of reducing the length of your loan or potentially lowering your monthly car payment. When you have a refinancing offer from a bank, credit union, or another lender, it's a good idea to take it to your current lender to see if they'll match the deal.
There are a couple of things that can prevent you from getting an auto loan refinance, including a prepayment penalty clause in your original loan or a decline in your credit since you first financed your car.
Check out our guide on how to refinance a car loan to learn more.