As automobiles become more and more expensive while incomes stay relatively stable, people are looking for ways to make car ownership more affordable. One way is long-term auto loans of 6 years (72 months) or longer. Although 72 month auto loans have some drawbacks, they also have some significant advantages over either leasing or the purchase of a used car.
Lower Payments: a Key Benefit
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They key benefit of a 72 month auto loan is that it lowers your monthly car payment. To be specific, given an interest free loan for $30,000, a 72 month payment would be $417 while a 60 month payment would be $500.00. This is a significant savings in monthly payment which makes it possible for people to afford a more expensive car.
When we look at monthly payments with interest included, the difference between a 60 month loan at 8.0% and a 72 month loan at 9.5% is still over $60.00 per month. This savings remains even though the longer-term auto loan carries a higher interest rate.
Higher Finance Charges, Longer Negative Equity
Given that most automobile loans carry interest, the 72 month loan also has a significant disadvantage. Although it costs less per month, it ends up costing more over the life of the loan. With the above example, the person opting for a 60 month loan would pay a little over $6250.00 in interest over the life of the loan. The 72 month loan, though, costs over $9150.00 in interest. Even if the rates were the same, the 72 month loan would still cost approximately 22% more due to the need to pay interest over a longer period.
The other drawback of a 72 month loan is that it extends the period of negative equity. Usually, a car is worth less than is owed on it for the first couple of years, unless a large down payment is made, but with 72 month loans less is paid down each month.
Given these drawbacks, though, a 72 month loan can still be an attractive alternative to a 36 or 48 month lease. In a lease, the owner enjoys lower payments, but has to face a large balloon in the future. With the loan, the car will ultimately be owned, and this is a key benefit.
