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Is a long-term car loan an ideal idea? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial decisions by offering you interactive financial calculators and tools, publishing original and objective content, by enabling you to conduct research and compare information for free to help you make sound financial decisions. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this website are provided by companies who pay us. This compensation can affect the way and where products appear on this website, for example such things as the order in which they appear within the listing categories, except where prohibited by law for our loan products, such as mortgages and home equity, and other products for home loans. This compensation, however, does affect the information we publish, or the reviews you read on this site. We do not include the entire universe of businesses or financial deals that may be open to you.
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4 minutes read. Published on January 30, 2023.
Authored by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ways and pitfalls of taking out loans to buy the car they want.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to control their finances with clear, well-researched information that is broken down into complex topics into manageable bites.
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The process of buying a car is far more than deciding to purchase an SUV or a sedan in red or black. If you’re buying the car with the help of a loan, you’ll also have decide on what repayment terms make the most sense for your financial and budget objectives. Car prices are still steep compared to before there was the pandemic COVID-19. The cost of a new car in December 2022 was greater than $49,500, which is 5 percent higher than the same month a year earlier and more than 20 percent higher than December 2020 . The longer the loan term — typically between 24 and , which is between two and seven years — the lower your monthly installments will be. But be aware that the lower your monthly payments have drawbacks, including potentially costing you more in the course of time. For most drivers that are in the long run, a long-term auto loan would not be wise idea. Reasons to avoid a long-term car loan The longer-term loans are appealing because the monthly payments will be lower than those of the shorter-term loan. Although they permit you to purchase a higher-priced vehicle, they also make payments that are affordable, car loans could put you in a worse spot financially If you’re not careful. The more likely you are to be upside down on loan A longer loan period means that you’re more likely to become upside down at some point in the future. Being upside down on an auto loan means you are owing more than the vehicle is worth. This is due to a greater portion of the monthly payments early in the loan will be spent on interest rather than the principal owed. Being upside down can be risky for a variety of reasons. If you had a car accident where the vehicle is considered to be to be a total loss, you may end up needing to pay back a loan for a car is no longer able to drive, if insurance isn’t covering it. Additionally, the longer you are upside down on the car loan as well, the more time you have negative equity. Trading in a car with negative equity could mean that you won’t get enough money to pay off the loan — you might even need to take out. Vehicle depreciation Depreciation is not a problem for used vehicles during the initial few years. But, long-term loans on cars that are used aren’t the best idea. A used car likely already has a significant number of miles on it, and a longer-term loan will allow the miles to increase. For example, assume that you purchase a car that is three years old with 36,000 miles on it and that’s the amount the typical American is driving in this amount of time. If you took out a 6-year loan and travel 12,000 miles a year, which is the norm in America is 72,000 miles. This means that your vehicle would have 108,000 miles and will be nearing 10 years old by the time it’s paid off. If you choose to sell it sooner, you may find it’s not worth the money or, even worse, you have no equity at all. The longer-term loans with higher interest typically have a higher rate of interest . This is because longer loans are riskier for lenders. If you have a long loan duration it is more likely that things could impact your financial situation before the loan is paid back in full. Even when the interest rate of a long-term loan is similar to one with a shorter duration however, you’ll still have to pay more in interest over the course of the loan because you will be paying interest for a longer time. Although your wallet might feel relief from the decreased amount of interest, the sacrifice might not be worth it. This is a particularly important aspect to consider because you consider that the Federal Reserve continues to to tackle the issue of inflation caused by pandemics. When the Fed increases benchmark rates it raises interest rates private lenders offer for personal loans and auto loans. The median new loan rate for 2022 was 5.16 percent . However, rates ranged from 3.84 percent to those having the highest credit scores to 12.93 percent for those with the weakest or the least subprime scores. You’re stuck with the same vehicle Before signing off on the car loan which is as long as 84 months, ensure you’ve considered whether you’ll want to use the same car throughout the entire term. Seven years is a long duration. Your circumstances and requirements might change. But, with a long-term loan you’ll be stuck with the same car. And in most cases it is the case that extending the loan will cost you money. Alternatives to a long-term auto loan There are many other ways to purchase a car without taking the risks that come with a long-term car loan. Lease a vehicle If you are struggling to get an approval for a favorable loan, you may . leasing can help you pay lower monthly installments. Even drivers with fair credit are more likely to receive approval for a lease, and you can still get behind the wheel of an extremely new car. The downsides of leasing are important to take note of. They include restrictions on how many miles you’re able to drive during the lease term and fees for excessive wear and wear. Perhaps most important most importantly, you’ll need 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 pay back your loan. This makes you more likely to get approval, even if your own credit isn’t perfect. Consider a large down payment If you want to cut down on your monthly expenses by making a large down payment is a great option. The greater the amount you put down initially then the less your monthly payment will be. You are also likely to receive more favorable interest rates with your lender. Is a long-term car loan worthwhile? A long-term car loan is not usually an ideal option due to the increased risk to your finances. While the lower monthly payment for a long-term auto loan may be appealing initially, it’s better to save up some additional cash to increase the amount of down payment, or opt for a cheaper car and ensure that the monthly cost is reasonable for a smaller loan. The bottom line Before signing on to a long-term car loan take into consideration the disadvantages. In addition to costing extra over the term of the loan it could also mean that you end up becoming upside down on the loan . Furthermore, your car requirements could change within five to seven years, when you’re still paying off that loan. Consider the options for long-term loans for example, making a bigger down payment or leasing a vehicle, or obtaining a co-signer with a credit score can help you obtain better loan conditions.
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Authored by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the details of taking out loans to purchase a car.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances with concise, well-studied facts that break down complex topics into manageable bites.
Auto loans editor
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