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4 minutes read. Published January 30, 2023
Written by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ins and outs of securely taking out loans to buy a car.
Edited 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 confidence to manage their finances with clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces.
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A car purchase is more than just deciding to buy an SUV or sedan in red or black. If you’re buying the car using the help of a loan it is also necessary determine which repayment terms make most fit for your financial and budget goals. Prices for cars are still high when compared to prior to the COVID-19 pandemic. The average price of a new vehicle during December 2022 was more than $49,500 — 5 percent more expensive than the previous month one year earlier , and more than 20 percent higher than December 2020 . The longer your loan term — typically between 24 and , which is between two and seven years — the lower your monthly payment will be. But remember, a lower monthly payment has negatives, and could cost you more in the long term. For the majority of drivers, a long-term car loan would not be great idea. There are many reasons not to take out the long-term car loan Longer-term car loans are appealing because the monthly payments are lower than those of short-term loan. Although they permit you to buy a more expensive car while still making payments that are affordable, car loans can put you in a more difficult spot financially If you’re not careful. It is more likely that you will end up upside down on loan An extended loan period means that you’re more likely to become upside down eventually upside down in near future. Being upside on a car loan means that you owe more than the car is worth. This is due to the fact that a larger part of your monthly payments at the beginning of the loan will be used to pay interest, rather than the principal amount owed. A loan that is upside down could be dangerous for several reasons. If you had an accident in which the car is considered to be a total loss, you may end up having to pay off a loan on a car that you can no longer drive if the insurance won’t cover the cost. In addition, the longer you are upside down on your car loan and the longer you’re suffering from negative equity. The idea of trading in a car that has negative equity could mean that you won’t get enough money to pay back the loan — and you may be forced to take it out. Depreciation of vehicles isn’t a major issue when it comes to used vehicles since during the initial few years. Even so, long-term car loans for used vehicles generally aren’t a good 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. As an example, suppose you purchase a vehicle that’s three years old with 36,000 miles, which is what the typical American will drive for the same amount of time. If you take out a six-year loan and you drive 12,000 miles annually, the norm in America is 72,000 miles. This would mean your car will have 108,000 miles, and will be nearing 10 years old by the time you pay it off. If you decide to sell it earlier then you could find it’s not worth the money, or worse, that you have no equity at all. Higher interest Longer-term lengths typically have a higher rate of interest . This is because longer loans are riskier for lenders. With a protracted loan period you are more at risk of things could impact your financial situation prior to the loan is fully repaid. Even in cases where the interest rate for an extended loan is similar to a shorter term however, you’ll still have to have to pay more interest over the duration of the loan due to making payments on interest for a far longer period. While your bank account may feel relief from the decreased , the trade-off might not be worth the cost. This is an especially important factor to take into account since the Federal Reserve continues to to combat the issue of pandemic-related inflation. When the Fed raises benchmark rates, it increases the interest rates that private lenders provide for personal loans and auto loans. The new average loan price for the year 2022 was 5.16 percent . However, rates ranged from 3.84 percent for those with the best credit scores up to 12.93 percent for borrowers who have the lowest or deep subprime scores. Stuck with the same vehicle When you sign an auto loan that’s up to 84 months, ensure you’ve and consider whether you will want to drive that same vehicle for the duration of the loan. Seven years is a very long period of time. Your needs and circumstances might change. However, if you take out a long-term loan you’ll remain in the same vehicle. And in most cases it is the case that extending the loan is costly. Alternatives to a lengthy auto loan There are other alternatives to purchase a car without taking the risk associated with a lengthy car loan. Lease a vehicle If you’re having trouble getting approved for an affordable loan, you may . Leasing can provide more affordable monthly installments. Even drivers with fair credit are more likely to get an approval to lease and be driving a fairly new vehicle. The downsides of leasing are something you should remember. They include limitations on how far you can drive the vehicle during the lease term and charges to cover excessive wear and wear and tear. Most important of all, you’ll need to return or exchange the vehicle when the lease comes to an conclusion. Find a co-signer good credit provides potential lenders with extra reassurance that you’ll pay back the loan. This makes you more likely to receive approval even if your credit score is not perfect. Set up a high-down payment If you want to cut down on your monthly expenses by making a large down payment down payment is an excellent alternative. The larger the amount you put down initially then the less the monthly cost will be. You are also likely to be offered better rates from your lender. Are long-term car loan worthy of the risks? A long-term auto loan is often not a good idea because of the risk of financial loss. While the lower monthly payments for a long-term auto loan may be appealing at first, it is better to save up some additional cash to boost the down payment or choose a car that is less costly to ensure that the monthly installment is reasonable for a smaller loan. The main point to remember before signing onto a long-term auto loan, consider the downsides. In addition to costing extra over the duration of the loan and a possible risk of being upside down with the loan . Additionally, your vehicle needs could be different in five to seven years, when you’re still paying off the loan. Take a look at options for long-term loans for example, paying a higher down and leasing a car or finding a co-signer whose credit score can help you get better loan conditions.
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Writen by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the details of borrowing money to purchase a car.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances with concise, well-studied data that breaks otherwise complicated topics into bite-sized pieces.
Auto loans editor
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