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4 min read Published January 30, 2023
Writen by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ways and pitfalls of using loans to buy 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 committed to helping readers gain the confidence to manage their finances through providing precise, well-studied information that breaks down complicated topics into bite-sized pieces.
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Purchasing a vehicle takes much more than choosing whether to purchase an SUV or a sedan in red or black. If you’re buying the vehicle using a loan it is also necessary determine which repayment terms will make the most suitable to meet your budget and financial goals. Prices for cars are still high when compared to prior to that COVID-19 epidemic. The average cost of a brand new car in December 2022 was greater than $49,500, which is 5 percent more expensive than the previous month one year earlier , and more than 20 percent higher than in December 2020 . The longer your loan duration — usually ranges from 24 to which is between two and seven years — the lower your monthly payment will be. However, a lower monthly payment has disadvantages, such as the possibility of costing you more over the long term. For most drivers who are looking to purchase a car for a long time, a lengthy loan is not a good choice. The reasons to stay clear of a long-term car loan Longer-term car loans are appealing because the monthly payments are smaller than those with a shorter-term car loan. Though they allow you to buy a larger car while still making payments that are affordable, car loans can put you in a bind financially when you’re not cautious. It is more likely that you will end up upside down on 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 means that you owe more than the car is worth. This is due to the fact that a larger portion of the monthly payments early in the loan will be used to pay interest, rather than the principal due. In the event of an upside-down loan, it can cause danger for many reasons. If you were to have an accident that caused the car is considered a total loss, you may end up paying off a loan on a car that you are unable to drive, if insurance isn’t covering the cost. Additionally, the longer you are upside-down on the car loan and the longer you’re in negative equity. Trading in a car with negative equity means you likely will not be able to pay off the loan — you might be forced to take it out. Vehicle depreciation is not a problem with used cars since a during the initial few years. However, long-term car loans on used cars usually don’t work. The car you are buying has a significant number of miles on it and a longer-term car loan allows the miles to increase. Consider, for instance, that you purchase a car that is three years old that has 36,000 miles that’s what the average American will drive for the same amount of time. If you get a six-year loan and travel 12,000 miles annually, the standard in America will be 72,000 miles. This means that your vehicle would have 108,000 miles on it and would be approaching 10 years old by the time you pay it off. If you decide to trade it in sooner and you find that it’s not worth the money or, worse, there is no equity whatsoever. The longer-term loans with higher interest typically are accompanied by higher rates . This is because longer loans are more risky for lenders. With a longer loan period it is more likely that things could impact your financial situation before the loan is fully paid. Even if the interest rate for an extended loan is the same as one with a shorter duration but you’ll be paying more interest over the life of the loan due to making payments on interest for a longer time. Although your wallet might be relieved from the reduced , the trade-off might not be worth it. This is an especially important factor to take into account since it is the case that Federal Reserve continues to to combat the issue of pandemic-related inflation. When the Fed increases benchmark rates it drives up interest rates private lenders offer for personal loans as well as auto loans. The new average loan price for the year 2022 was 5.16 percent . The rates varied from 3.84 percent for those with the best credit scores up to 12.93 percent for those with the lowest or deep subprime scores. You’re stuck with the same vehicle Prior to signing an auto loan that’s up to 84 months, be sure you’ve and consider whether you’d like to drive the same vehicle throughout the entire term. Seven years is a long duration. Your circumstances and requirements could shift. However, if you take out a long-term loan, you will be stuck with the same vehicle. And in most cases you will have to pay the loan will cost you money. Alternatives to a lengthy vehicle loan There are many other ways to get a vehicle without taking the risk associated with a lengthy car loan. Lease a vehicle If you’re having trouble getting approved for an acceptable loan You may be able to lease a car . leasing can help you pay lower monthly payments. Even drivers with fair credit are more likely to get an approval to lease, and you can still be driving a fairly new vehicle. The downsides of leasing are something you should take note of. They include limitations on the number of miles you’re allowed to drive throughout the lease and fees in excess wear and wear. Perhaps most important is that you’ll need to return or exchange the car at the lease’s end. Co-signing with a person who has good credit score provides potential lenders with extra reassurance that you’ll pay back the loan. This makes you more likely to receive approval, even if your own credit score is not perfect. Consider a large down payment If your goal is to reduce your monthly expenses and save money, a high down payment down payment is an excellent option. The more you deposit initially then the less the monthly cost will be. Also, you are likely to get better rates from your lender. Are long-term car loan worthy of the risks? A long-term car loan is not usually an ideal option due to the risk of financial loss. While the lower monthly payments for a long-term auto loan might seem appealing at first, it is more beneficial to save extra cash to make the down payment or select a less expensive car and ensure that the monthly cost is reasonable for a smaller loan. When you are deciding to sign onto a long-term auto loan, consider the downsides. While it will cost extra over the term of the loan it could also mean that you end being upside down with the loan . Additionally, your vehicle needs could be different in five to seven years, when you’re still paying off that loan. Consider the alternatives to long-term loans for example, having a larger down payment and leasing a car or securing a co-signer whose credit score could help you achieve better loan conditions.
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Writen by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ways and pitfalls of taking out loans to purchase an automobile.
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 dedicated to helping readers gain the confidence to take control of their finances with concise, well-studied information that breaks down complicated topics into bite-sized pieces.
Auto loans editor
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