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4 min read Published 30 January 2023
Writen by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the details of borrowing money to purchase an automobile.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances with concise, well-researched and well-sourced information that is broken down into complicated subjects into digestible pieces.
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A car purchase is far more than deciding to purchase an SUV or a sedan, in red or black. If you’re buying the vehicle with the help of a loan and you’ll need determine what repayment terms make the most suitable for your financial and budget goals. Prices for cars are still high compared to before the COVID-19 pandemic. The average cost of a brand new car during December 2022 was more than $49,500, which is 5 percent more expensive than the previous month one year prior and over 20 percent higher than in December 2020 . The longer the loan period — generally ranges from 24 to which is between two and seven years — the lower your monthly installments will be. But be aware that a lower monthly payment has drawbacks, including potentially costing you more over the course of time. For the majority of drivers that are in the long run, a long-term auto loan would not be great choice. There are many reasons not to take out a long-term car loan longer-term car loans are attractive because the monthly payments will be less than those for short-term loan. Although they permit you to buy a more expensive vehicle, they also make the payments affordable, long-term car loans can put you in a bind financially If you’re not careful. More likely to become upside down with a loan An extended loan period means that you’re more likely to become upside down eventually upside down in future. Being upside down on an auto loan is when you owe more than the car is worth. This is due to the fact that a larger portion of the monthly payments beginning in the loan will be spent on interest rather than the principal due. A loan that is upside down could be risky for a variety of reasons. If you were to have an accident in which the car is deemed to be a total loss, you could end up still paying off a loan on a vehicle that you can no longer drive, if insurance isn’t covering it. Furthermore the longer you’re upside-down on the car loan, the longer you’re in negative equity. Selling a car with negative equity is a sign that you will not be able to pay off the loan — and you may even need to take out. Vehicle depreciation Depreciation isn’t a major issue with used cars since a within the first few years. However, long-term car loans for used vehicles generally aren’t a good idea. A used car likely already has plenty of miles on it and a longer-term loan allows the miles to pile up even higher. As an example, suppose you purchase a car that is three years old that has 36,000 miles, which is what the average American would drive in this amount of time. If you get a six-year loan and you drive 12,000 miles per year, which is the average in America is 72,000 miles. This would mean your car would have 108,000 miles and could be close to 10 years old by the time it’s paid off. If you decide to sell it sooner, you may find it’s not worth much or, worse, there is no equity at all. More interest Longer-term durations usually come with much higher . This is generally because longer loans are riskier for lenders. With a longer loan period, there’s a greater chance you’ll be affected by a change in your financial situation prior to the loan is fully repaid. Even if the interest rate of the long-term loan is similar to one with a shorter duration however, you’ll still have to be paying more interest over the course of the loan due to paying interest for a far longer period. Although your pocket may be relieved from the reduced cost, the price may not be worth the cost. This is a crucial factor to take into account because the Federal Reserve continues to to tackle the issue of inflation caused by pandemics. When the Fed raises benchmark rates, it increases interest rates offered by private lenders for personal loans and auto loans. The median new loan price for the year 2022 was 5.16 percent . The rates varied from 3.84 percent for those with the best credit scores to 12.93 percent for borrowers with the lowest or deep subprime scores. Stuck with the same vehicle Before signing off on an auto loan that’s as long as 84 months, ensure you’ve and consider whether you will want to use the same car for the duration of the loan. Seven years is an extremely long duration. Your requirements and needs might change. However, if you take out a long-term loan you’ll be stuck with the same car. And in most cases you will have to pay the loan will cost you money. Alternatives to a longer-term auto loan There are other options to get a vehicle without taking on the risks that come with a lengthy car loan. Rent a car If you are struggling to get an approval for an affordable loan it is possible to . Leases can offer more affordable monthly payment. Even drivers with fair credit are more likely to get the lease they want however, you are able to drive an incredibly new car. The downsides of leasing are something you should keep in mind. They include limitations on how far you’re able to drive during the lease period and fees to cover excessive wear and wear. Most important of all, you’ll be required to either return or replace the vehicle when the lease comes to an end. Co-signing with a person who has excellent credit rating provides prospective lenders with additional confidence that you’ll be able to pay the loan. This makes you more likely to receive approval even if you have credit isn’t perfect. Consider a large down amount if you are looking to lower your monthly costs, making a high amount down payment is a good alternative. The larger the amount you deposit initially and the more affordable your monthly payments will be. Additionally, you will receive more favorable rates from your lender. Are long-term car loan worthwhile? A long-term car loan is not usually an option due to the added financial risk. While the lower monthly payments on a longer-term car loan might seem appealing initially, it’s more beneficial to save additional cash to boost the amount of down payment, or opt for a cheaper car and ensure that the monthly cost is reasonable for a smaller loan. The main point to remember before signing onto a long-term auto loan take into consideration the disadvantages. While it will cost you more over the loan’s term, you may also end in a position where you’re upside down on the loan . What’s more, your vehicle needs could be different in five to seven years, when you’re still paying back that loan. Take a look at alternative to the long-term loans for example, having a larger down payment and leasing a car or securing a co-signer whose credit score can help you obtain more favorable loan terms.
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Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the details of borrowing money to purchase the car they want.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain confidence to control their finances through providing precise, well-researched and well-structured information that breaks down otherwise complex subjects into digestible pieces.
Auto loans editor
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