A car payment is often one of the largest recurring expenses in a household’s monthly budget. Because of this, it’s not surprising that many car purchasers are now choosing to spread out the cost of a new car over extended periods of time using longer-term loans. These longer-term auto loans typically last 72 or 84 months and generally have lower monthly payments than shorter-term loans.
This can make them an attractive option, both for budget-conscious car shoppers and for those who want to buy a more expensive car than they could afford with a standard loan length. Longer loans do have significant drawbacks; however, which car buyers should carefully evaluate before they make a loan commitment.
Car loans are a form of secured debt. “Secured” means that the borrower’s obligation to pay the loan is secured by property and that the lender has the right to take back the property if the borrower fails to pay that debt as agreed. Mortgages and car loans are the most common examples of secured debt. A foreclosure happens when a lender takes back a house secured by a mortgage. A repossession is when a car lender takes back a car for nonpayment. Debt that is not secured by any property, like medical bills or money owed on a typical credit card account, is called unsecured debt.
The amount of a car loan’s monthly payment depends on several things, including:
The price of the vehicle,
The length of the loan term,
The amount that the borrower is able to put down as a down payment, and
The interest rate of the loan.
The interest rate that a bank, credit union, or other financial institution offers to a borrower depends a great deal on the borrower’s credit score. The three major credit reporting bureaus — Experian, Equifax, and TransUnion — calculate your credit score based on your credit history. In general, a purchaser with a high credit score will usually be able to get a lower rate than a purchaser with a lower credit score. If you need to finance a car purchase with a loan, having bad credit can drive up your new car’s cost by quite a lot.
Both rising car prices and buyer demand have fueled the increasing popularity of longer-term vehicle financing. Long-term loans spread out the cost of a new vehicle over a longer period of time, making monthly loan payments more affordable. This can be a tremendous benefit to the budget-conscious car shopper, especially if the need to buy a new vehicle arises suddenly. Lower payments can also help people buy a more expensive car than they would be able to afford using a loan with a shorter term.
Long-Term Auto Loans
Any vehicle financing that exceeds a loan term of 60 months, or five years, is considered a long-term auto loan. Long-term loans are typically offered as 72-month car loans, which last for a term of six years, and 84-month car loans, which last for a term of seven years. Both 72-month and 84-month auto loans are now commonly offered by credit unions, automakers’ financial divisions, and other financial institutions.
Relationship Between Total Interest and Loan Length
The interest rate affects a loan’s monthly payment as well as the total interest that a borrower pays over the life of the loan. You can use Upsolve’s Debt Payoff Calculator to quickly see how different interest rates affect the overall cost of an item. The interest on a loan for a used car is usually higher than it is for a new car, and a lender is likely to charge higher interest rates for long-term loans than for shorter-term loans.
It’s important to note how loan length affects the total interest you pay over the entire life of the loan. As the loan length gets longer, the total amount of interest you pay increases. For example, on a $15,000 loan at 3% interest, you would pay $1,171.82 in total interest on a 60-month loan, $1,409.17 on a 72-month loan, and $1,648.76 on an 84-month loan.
Pros & Cons of 72-Month or 84-Month Auto Loans
Before committing to a long-term loan to finance your purchase of a new vehicle, you should carefully evaluate the pros and cons of these loans and how they relate to your own financial situation. If you’re not familiar with car financing methods at all, seek advice from a competent financial professional before making this kind of commitment. Once you've made a car purchase, it's difficult to get out of.
A representative from your usual bank or local credit union may be a good place to start to learn more about financing a vehicle. They may also be able to provide you with a loan preapproval letter, which will help you determine how much car you can afford before you even walk into a dealership.
Benefits of 72-Month & 84-Month Auto Loans
A long-term loan can allow you to buy a more expensive vehicle than you could otherwise afford. Also, because the monthly payment on a longer-term loan is usually smaller than a shorter-term loan, the smaller monthly payment could be easier to accommodate into your budget.
With a lower monthly car payment, you could use the extra cash in your budget in ways that improve your overall financial health. For example, you could pay down more expensive debt that you have, like a high interest credit card balance or personal loan. You could also use the extra money to establish a savings fund, perhaps even for the purpose of handling car repairs after the car’s warranty expires. You could also invest the extra funds.
Having a low monthly car payment can also assist in minimizing your overall debt to income ratio, which may help you qualify for both the vehicle financing you are seeking and other future loans. Your debt-to-income ratio is the total of your monthly debt service payments divided by your monthly income.
Drawbacks of 72-Month & 84-Month Auto Loans
The following sections describe the potential drawbacks of getting a longer-term car loan. Car buyers should consider these issues carefully before making any sort of commitment to purchase.
Longer Loans Are More Expensive
Unless you have extremely good credit and are able to get 0% interest financing on a car, a long-term loan will be more expensive than a shorter-term loan in the long run. The first reason for this is that spreading out payments over more years increases the total interest paid over the life of the loan. The second reason for this is that the interest rate charged on a 72-month, or 84-month auto loan is typically higher than on a shorter-term loan.
Your Car Warranty Will Expire Before the Loan Is Paid Off
Most car warranties will expire well before a 72-month or 84-month auto loan ends, and an extended warranty is often quite expensive. If you have a major repair expense after your warranty’s expiration date, you’ll likely have to find a way to pay for repairs out of pocket. If those repairs are needed while you’re still making payments on the loan, this could put your finances in a bit of a crunch that might be hard to get out of.
Even if a necessary repair is so serious that no one other than a junk dealer would be interested in buying your car, you will still be obligated to pay the loan. Failure to pay the loan will likely result in a creditor lawsuit, followed by a court judgment and attempts by the creditor to garnish your paychecks, bank accounts, and other assets.
When you owe more on your car than it’s actually worth, you have negative equity. This can happen quickly with a long-term loan because cars depreciate, or lose their value, in a short period of time, especially in the first year of ownership. With a long-term loan, the amount you owe will also decrease more slowly, which puts you in the position of having negative equity in your car. This can also be called being upside down or underwater on your loan.
Negative equity on a vehicle can lead to serious problems in the event your car is totaled or stolen, because your collision or comprehensive auto insurance will pay out only up to the depreciated value of your vehicle. Unless you bought gap insurance, which pays to the lender the difference between the loan balance and the car’s depreciated value, you will personally owe that “gap” amount to the lender. Gap insurance is usually available only for purchases of newer cars.
Having negative equity in a car also affects your options if you need to sell and get a new car before the loan term ends. You may be able to do a trade-in of your car and refinance your existing loan balance by adding it onto a new loan, but this practice will likely cause the new vehicle to be immediately underwater. Refinancing in this circumstance is not ideal because it tends to create a cycle of being chronically underwater with every new vehicle purchase.
Having a long-term loan can considerably reduce your financial flexibility. Within the six- or seven-year term of a 72-month or 84-month auto loan, it is unlikely that your life will remain exactly as it is today. Changes to your income or expenses could cause your car payment to become too high, leading to increased risk of repossession and bad credit due to missed payments or a repossession being reported on your credit report. Also, a change in employment, a new baby, or an unexpected move to a different climate could put you in the awkward position of needing to buy a new type of vehicle before your long-term loan ends.
Alternatives to Long-Term Auto Loans
If you’re unsure whether a long-term loan is the best vehicle financing choice for you, there are alternatives. One possible solution is to purchase a less expensive car, which would require less financing. Another option would be to lease a car, as leasing typically costs less per month than financing. Also, if someone you know would be willing to be a cosigner for you, it could reduce your monthly payment if that person’s credit score is high enough to lower your interest rate.
Another possible solution is to start saving money for a higher down payment, which would reduce your loan amount as well as your monthly payments. If you want to save for a down payment and make sure you can afford the payments on a 60-month car loan, you may want to add the car payment into your budget well before you buy a car and set the monthly payments aside in a savings account. After three to six months of doing this, you’ll know if you can afford the higher monthly payment and you’ll have a bit more savings to put toward a down payment.
If you do determine that the best decision for you right now is a long-term loan, and you expect your income to increase in the near future, you could still refinance the long-term loan to a shorter loan term when your cash flow increases.
Car loans with terms over 60 months are becoming more popular as car prices increase. Buyers can spread out their monthly payments over six years with a 72-month car loan or seven years with an 84-month car loan. A lower monthly payment may improve a purchaser’s financial health if the extra cash is applied to more expensive credit card debt, or if it is saved or invested.
However, long-term auto loans are more expensive than shorter-term loans in the long run because the borrower pays more in interest. Other pitfalls include reaching the car warranty’s expiration date prior to the loan’s payoff, quickly becoming underwater on the loan due to depreciation, decreasing your long-term flexibility, and adding to the risk defaulting and repossession.