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4 min read Published 30 January 2023

Authored by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ways and pitfalls of borrowing money to purchase the car they want.

Editor: 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 the confidence to take control of their finances by providing clear, well-researched information that is broken down into complicated topics into bite-sized pieces.

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A car purchase is far more than deciding to buy an SUV or sedan in red or black. If you’re buying the car through the help of a loan it is also necessary decide on which repayment terms make most suitable to meet your budget and financial goals. Prices for cars are still high compared to before that COVID-19 epidemic. The price of a new vehicle in December 2022 was greater than $49,500 — 5 percent higher than the same month one year earlier and more than 20 percent higher than December 2020 . The longer your loan duration — usually ranging from 24 to , which is between two and seven years — the lower your monthly installments will be. But be aware that a lower monthly payment has drawbacks, including potentially costing you more over the long run. For most drivers, a long-term car loan would not be great option. Reasons to avoid the long-term car loan The longer-term loans are attractive due to the fact that the monthly installments will be less than those for short-term loan. Although they permit you to buy a more expensive car while still making the payment affordable, long-term car loans could put you in a worse spot financially If you’re not careful. 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 on a car loan means that you are owing more than the vehicle is worth. This is due to the fact that a larger part of your monthly payments at the beginning of the loan will go toward paying interest instead of the principal owed. A loan that is upside down could be dangerous for several reasons. If you were to have a car accident where the car is deemed to be a total loss, you could end up still paying off the loan on a vehicle that you can no longer drive if the insurance won’t cover it. Additionally, the longer you are upside down on your car loan and the longer you have negative equity. Selling a car with negative equity could mean that you will not be able to pay back the loan — you might be forced to take it out. Depreciation of vehicles isn’t a major issue when it comes to used vehicles since within the first few years. But, long-term loans for used vehicles generally aren’t a good idea. A car that is used likely has plenty of miles on it and a longer-term loan will allow the miles to increase. Consider, for instance, that you purchase a car that is three years old with 36,000 miles on it that’s what the average American will drive for that length of time. If you take out a six-year loan and drive 12,000 miles per year, which is the average in America, you would add 72,000 miles. This would mean your car would have 108,000 miles and will be nearing 10 years old when it’s paid off. If you opt to sell it sooner and you find that it’s not worth the money or, worse, you have no equity whatsoever. Higher interest Longer-term lengths typically come with much higher . This is due to the fact that longer loans are riskier for lenders. If you have a long loan duration you are more at risk of something might impact your financial situation before the loan is fully repaid. Even if the interest rate on a long-term loan is similar to a shorter term however, you’ll still have to have to pay more interest over the duration of the loan due to paying interest for a longer time. Although your pocket may be relieved by the lower amount of interest, the sacrifice might not be worth the cost. This is a particularly important aspect to consider as 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 price for the year 2022 was 5.16 percent . However, rates varied between 3.84 percent for those with the best credit scores up to 12.93 percent for those with the lowest or deep subprime scores. Are you stuck with the same car? When you sign a car loan which is as long as 84 months, be sure you’ve considered whether you’d like to use the same car throughout the entire term. Seven years is a long period of time. Your requirements and needs may change. However, with a longer-term loan you’ll remain in the same vehicle. In most cases it is the case that extending the loan is costly. Alternatives to a lengthy car loan There are other options to get a vehicle without taking the risks that come with a lengthy car loan. You can lease a car if you’re struggling to get an approval for a favorable loan You may be able to lease a car . Leases can offer more affordable monthly installments. Even drivers with fair credit are more likely to receive an approval to lease however, you are able to drive an extremely new car. The downsides of leasing are important to take note of. There are restrictions on how many miles you can drive the vehicle during the lease term and fees to cover excessive wear and tear. Most important is that you’ll have to return or exchange the car at the lease’s end. Get a co-signer A with good credit score provides potential lenders with extra reassurance that you’ll pay back the loan. This makes you more likely to be approved, even if your own credit is imperfect. Consider a large down payment If you want to lower your monthly costs and save money, a high down payment is a great alternative. The more you deposit initially, the lower your monthly payments will be. Additionally, you will be offered better rate from the lender. Are long-term car loan worth the risk? A long-term auto loan is not usually an option due to the added financial risk. Although the lower monthly cost on a longer-term car loan might seem appealing at first, it is best to save additional cash to increase the down payment or to opt for a cheaper car, so the monthly payment is reasonable for a smaller loan. When you are deciding to sign to a long-term auto loan be aware of the negatives. Apart from costing extra over the term of the loan it could also mean that you end up becoming upside down on the loan . Furthermore, your car needs may be different within 5 to 7 years when you’re still paying back that loan. Take a look at alternative to the long-term loans like making a bigger down payment and leasing a car or finding a co-signer whose credit score could help you achieve more favorable loan conditions.


Writen by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ins and outs of securely borrowing money to purchase an automobile.

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to manage their finances through providing precise, well-researched and well-structured information that breaks down complex subjects into digestible pieces.

Auto loans editor

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