Do You Have to Be Crazy to Take on a 96-Month Auto Loan?

Posted in Auto Loans • December 15, 2012

96-month Auto LoanThere are so many options for auto loans that suit the needs of the everyday car buyer — and thank goodness for that! Some people only need one year or two to pay off their vehicle’s loan, while others require several.

However, it is definitely possible to take too long. Even so, some car dealerships offer the opportunity to make payments over a 96-month period, which may seem like a deal at first, but could result in a number of major drawbacks for the borrower.

How a 96-Month Auto Loan Works

Many borrowers would cringe at the thought of making car payments for five years — let alone eight, or just two years shy of a decade. However, for others, having more time to pay off the car loan could be a lifesaver, especially at higher auto loan rates.

A 2012 report from Experian proved that people are indeed moving toward longer-term auto loans. According to the report, six- and seven-year car loans have increased by 26.4 percent year over year, while four- to five-year loans dropped by nearly 20 percent. In fact, the report revealed 58 percent of all auto loans are now at least five years in length.

Part of the reason for this jump in longer-term loans is the drop in credit scores over the past few years. According to a separate report from Experian Automotive, the average car buyer in 2010 had a credit score of 776 in 2010. This score dropped to 760 in the first quarter of 2012.

Many longer-term auto loans are designed for subprime borrowers, which means they may be the only option for those with bad credit who need to finance a vehicle. But does this mean that an 8-year auto loan is a better option than short-term loans?

8-Year Auto Loan Versus Short-Term Auto Loan

It’s important to examine both the pros and cons of going with such a long-term financing commitment, like an 8-year auto loan, in comparison to a shorter-term loan option:

Pros and Cons of a Short-Term Auto Loan

  • Higher monthly payments: Because you are condensing the number of payments made for a car with the same price tag, you’re typically going to opt for higher monthly payments.
  • More competitive rates: Shorter-term loans are most common in the auto loan industry, which means more dealerships and automakers will issue lower interest rate options and car rebates to help reduce the total price of the vehicle.
  • Less interest paid in total: Even though payments are higher, shortening the amount of time you take to pay off a loan means you will pay less interest over the life of the loan.
  • Lower negative equity: Negative equity — or an upside down auto loan – means you owe more on your car loan than your actual car is worth. Depending on how fast your car depreciates and how much interest is tacked onto your loan, you could face negative equity. However, a shorter-term loan increases the likelihood that you won’t have to worry about negative equity.

Pros and Cons of a Long-Term Auto Loan

  • Lower monthly payments: For the person who wants to break down the total cost of a car into smaller monthly payments, a longer-term loan could help make the vehicle more affordable. For instance, if you purchase a vehicle for $25,000, at 5% APR, over five years, you will make payments of approximately $471.78 per month. If you were to extend the loan to eight years, you would pay just $316.50 per month.
  • More interest paid: Since you will make interest payments for many more months, you will pay higher total interest for the car. Using the same $25,000 car with a 5% APR over five years, you would end up paying approximately $3,306 in total interest. However, paying the same interest rate on an 8-year auto loan would result in spending $5,384.
  • Higher negative equity: With a longer-term loan, the depreciation in value of your car increases the likelihood that you will owe more on your car than it is worth each year that passes.
  • Warranty issues: Many vehicle warranties only stretch out over a three- to five-year period, which means it’s up to the car buyer to seek a vehicle with a longer warranty, or risk having a vehicle break down out-of-warranty while still making payments.

As you can see from the comparisons, it appears that there are more reasons to purchase a vehicle under a shorter-term loan, but does this mean you should never purchase a car with an eight-year auto loan?

Are You Crazy to Take on a Long Auto Loan Term?

As told to CNBC’s Behind the Wheel by Scott Adams, President of Adams Automotive Group, it’s not as crazy as it seems to opt for a longer-term loan. One reason is because the likelihood of a vehicle actually breaking down before the loan is up has decreased considerably. “The average car on the road is 10 years old and has 150,000 miles,” Adams explained.

Most drivers aren’t having any trouble keeping up with payments, no matter how long their loan terms are, he said. One reason could be that the demographic for longer-term loans is not what some may think.

The people opting for these loans are actually older consumers who have “lived in their house a long time and their car is worn out” and they simply need another car, Adams noted. Most likely, this person is living on a budget, but is responsible with money and will make payments on time.

He also explained that not as many drivers are experiencing negative equity as one would assume. While he did not outright promote the concept of taking a very long-term loan, he did note, “It isn’t quite as bad as it looks.”

Of course, making the decision to take on any type of auto loan is one that requires plenty of thought and consideration. Choosing a reputable lender, finding affordable auto loan rates and locating a quality vehicle that can last a long time (preferably with a longer warranty) all matter.

So would you be crazy to want to take on a 96-month auto loan? Not necessarily. If you plan to keep the car a long time, know the potential depreciation value of the car and have money stashed in the event that your warranty runs out prior to the loan term ending, the lower payments may be worth paying more in interest.


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