Lenders and finance companies have been approving long-term auto loans more often than ever before. According to a research by JD Power & Associates, more than 80% of auto loans are now 60 to 78 months long, and 8 year auto loans and longer are becoming increasingly popular. These include:
- 72 Month Auto Loans (6 years)
- 84 Month Auto Loans (7 years)
- 96 Month Auto Loans (8 years)
Advantages and Disadvantages of Long-Term Car Loans
While there are certain advantages to long term car loans — otherwise they wouldn’t be so popular — there are also pitfalls.
Advantages
Smaller car payments are the #1 reason people opt for auto loans of 6 years or longer. Since the total amount to be repaid is spread out over a longer time period, your minimum monthly payment amount can be significantly reduced over a shorter-term auto loan. This can allow a buyer to get into the driver’s seat of a vehicle that they could not have otherwise afforded, or just to enjoy more affordable payments. Dealers like to be able to get their customers into the vehicle they desire, so if a longer-term auto loan makes the payments low enough for a buyer to afford, they may encourage a 72, 84, or even 96 month auto loan.
Disadvantages
Who doesn’t want smaller monthly payments? Unfortunately, the longer loan term means greater vehicle depreciation. Most vehicles depreciate at a rate of about 15-20% each year. 3-4 years into a 5 year auto loan, the vehicle is typically worth a little more than the loan balance you have left to pay off. If you wanted to trade in the vehicle at that time, the profit you make could be rolled into a down payment. 3-4 years into a loan of 7+ years, however, you will have paid off much less of the loan balance. When a car has depreciated to a value of less than what’s still owed on the auto loan, that’s termed negative equity – or more colloquially referred to as an upside down auto loan. If you wanted to trade-in or sell the vehicle at this point, you would still owe money to your bank or lender.
When it comes to the really drawn-out financing options, such as an 84 month auto loan or even the 96 month auto loans that have been becoming popular, you may have to think about the fact that car repair costs could become significantly toward the end of the term, as the vehicle will be 7-8 years old.
Special Cases
There are some special cases when these disadvantages may not apply. Many vintage and classic autos are virtually depreciation-proof. In fact, people often buy their classics as an investment, as they know or expect the vehicle will only appreciate in value over time. In this case, 7-8 year financing may be a smart option, especially if the vehicle is expensive. Another case is people with A+ credit and high income who would like to buy a luxury automobile but do not want very high monthly payments.
Many big automakers, including GMAC and Toyota, as well as smaller banks and credit unions, now offer financing terms of 84 months or even longer. You may well decide that such a long-term auto loan is the right choice for you. Before you do, however, be sure to weigh the advantages and disadvantages, as well as how they apply to your unique financial situation. A long term auto loan will cost more in the long run; however, it could also help you afford the vehicle you want.
