The ‘6-Year Car Loan Trap’: Why It Quietly Costs Drivers Thousands

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Stretching your loan over more years might seem like an easy fix for lowering your monthly payment. But it comes with plenty of drawbacks. 

Watch out for these pitfalls before borrowing a six-year car loan.

Greater Risk of Overspending

Since lenders underwrite based on cash flow, often they’ll lend you more money if you borrow a longer loan. That means you can theoretically spend more on a car, even though you’d be better off spending less. 

More Interest Paid

Over the life of the loan, you’ll pay far more in interest for longer loans.

“Many borrowers spend $2,500 to $5,000 more overall, depending on the interest rate and purchase price,” explains Melanie Musson, auto industry expert with AutoInsurance.org. 

Running the numbers through a loan calculator, a four-year loan of $30,000 at 8% interest would cost you $5,155 in total interest. At five years, the same loan would cost you $6,498, and at six years, it would cost you $7,872. That’s $2,717 more in interest than the four-year option. 

Higher Interest Rate

That calculation above probably understates the greater interest paid. 

Lender Darren Burgess of YupLoans.com notes, “Stretching a car loan to six years seems great as it lowers the monthly payment, but it usually comes with a higher rate.”

Upside-Down for Longer

Cars are depreciating assets that lose value over time. The longer you stretch the debt, the more likely you are to become upside-down on the debt. 

“As cars depreciate fast, this might leave you owing more than what the car is worth for years, which is a real problem if you need to sell it or trade it in,” adds Burgess. 

It also poses a problem if you get into an accident and the car is totaled. The insurance check won’t cover your loan amount, leaving you to come out of pocket for the difference. You could buy gap insurance coverage, but then you add an unnecessary expense and defeat the purpose of lower monthly loan payments. 

Longer Debt Horizon

Too many Americans get comfortable with the idea of “forever debt.” Paying off your auto loan helps you avoid real risks however.

To begin with, older cars cost more to maintain and repair. The longer you hold your car loan, the more often you’ll have to cough up significant sums for repairs and maintenance even as you keep making monthly debt payments. 

Those ongoing monthly payments also limit your access to other credit. The more existing debt you carry, the less new credit — such as a home mortgage — you can qualify to borrow. 

It’s not fun or flashy to borrow and spend less money. But it will help you build wealth faster, and put more money toward changes that can improve your life more, such as a home purchase, dream travel, early retirement or your children’s education. 

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