The trend toward long-term loans for cars continues, with Experian reporting that 32.1 percent of new car buyers and 18.2 percent of used car buyers opted for long-term loans of between 73 and 84 months in the fourth quarter of 2016. Some car dealerships and credit unions offer even longer terms for auto finance, like a 96-month car loan. Extending loan terms lets car buyers get what they want while staying within their monthly budget, according to Melinda Zabritski, Experian’s senior director of automotive finance. Before you commit to a lengthy loan term, find out the advantages and disadvantages to consider when taking on a car loan.
Advantages and Disadvantages of a 96-Month Auto Loan
Learn what 96-month auto financing could mean for your finances by understanding both sides of this car finance option. Here are the benefits and drawbacks of a long-term auto loan:
Pros of a Long-Term Auto Loan
- Lower monthly payments: Breaking up the car cost into smaller monthly payments with 96-month financing could help make the purchase fit your budget. For instance, if you purchase a vehicle for $25,000 at 5% APR, over a five-year period you will make payments of $471.78 per month. If 96-month auto loan lenders financed your car, you would pay $316.50 per month.
- Afford a more expensive vehicle: With lower monthly payments, a buyer might be able to qualify for a larger loan amount and thus finance a more expensive car. These longer-term loans are offered by certain credit unions, such as the Navy Federal Credit Union and the North Carolina State Employees’ Credit Union.
Cons of a Long-Term Auto Loan
- More interest: 96-month auto loan rates might be the same as those for a shorter-term loan, but you will make interest payments for more months thus paying higher total interest. Using the same $25,000 car with 5% APR over five years, you would end up paying $3,307 in total interest. However, paying the same car loan interest rate on an eight-year car loan would result in spending $5,384.
- Higher interest rates: “Lenders may see long-term auto loans as a sign that you can’t afford the payments and therefore drive up your car loan interest rate to account for the perceived risk,” said Jonas Sickler, director of operations at ConsumerSafety.org.
- Difficulty finding a lender: “96-month notes are not offered as widely as short-term loans,” said Robert Drury, executive director of the Association of Christian Financial Advisors. “Fortunately, with the internet and communications today, it is not difficult to find a lender who offers longer terms, but finding dealership financing with 96-month terms may be next to impossible.”
- Higher negative equity: Typical new car depreciation is 22 percent in the first year alone. With a longer-term loan, depreciation increases the likelihood that you will owe more on your car than it is worth each year that passes or be “upside down” on your loan. When you sell it, you’re liable for paying the additional amount on the loan that the selling price doesn’t cover.
- Repair costs: “Most bumper-to-bumper warranties last 36,000 miles or three years,” Sickler said. “Most vehicles begin needing maintenance around 50,000 miles, and the big-ticket costs kick in long before 80,000 miles, putting consumers on the hook for thousands of dollars in repairs with months or even years of left to pay on the car loan.”
- Lost trade-in value: “96 months is a very long time, and most of us decide to trade our cars in before then,” Sickler said. “If you trade your car in before the loan is paid off, anything the dealer gives you must first go to paying off the financing before being used toward a down payment.”
Check Out: Best Credit Unions for Car Loans
Advantages and Disadvantages of Short-Term Auto Loans
A short-term auto loan is helpful if you want to pay off your car more quickly and have the means to do so. Check out the pros and cons of this kind of loan and decide if it’s the best auto finance option for you.
Pros of Short-Term Auto Loans
- More competitive auto loan rates: Car dealerships often combine short-term loans with incentives like low new car loan rates or even 0 percent deals subsidized by auto manufacturers.
- Less total interest paid: Even though payments are higher, shortening the amount of time you take to pay off a loan means you’ll pay less interest over the life of the loan.
- Lower negative equity: You are not as likely to be upside down with short-term loans because you build equity in the vehicle more quickly due to the higher payments and lower car loan interest rate.
Cons of Short-Term Auto Loans
- Higher monthly payments: Because you will make fewer payments for a car with the same price, your monthly payment is higher.
Should You Choose a Long-Term Car Finance Option?
The comparison shows 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 or longer auto loan term?
A long-term auto loan helps if you cannot afford higher monthly payments. Consider the pros and cons of such a loan before you visit a dealership, and weigh the cost of long-term loans against other factors. You always have other options like buying a used car.
Stacey Bumpus contributed to the reporting for this article.