Some financial experts say long-term car loans are a bad deal. But the fact is that a longer term loan can help make a new car more affordable for you or enable you to purchase a nicer, more expensive car that you need.
In a CNBC video, financial guru Suze Orman says, “Any car loan greater than 36 months is a sign of financial irresponsibility.”
But many people have loans that are longer, in some cases a lot longer.
Thirty-six months is only three years. But on average, car loans last 67 months, or a bit longer than five-and-a-half years, according to car information website Edmunds.com, and one quarter of car loans lasts as long as six or seven years, according to Experian Automotive.
Most car loans are quoted in months instead of years. So you’ll have to do the math—divide the number of months by 12—to find out how long the term is in years.
Orman says longer car loan terms are “insanely long” and “magically make an unaffordable car look affordable.”
She points out that:
• A longer loan means you’ll pay more in total interest.
• Keeping that debt going for so many years could make it harder for you to save money for emergencies, a down payment to buy a home, or retirement.
• A car loan could make it more difficult for you to qualify for a mortgage.
Car loan terms have been getting longer as new cars have become more costly, but consumers’ incomes haven’t increased enough to make those higher prices affordable, according to a Kiplinger report.
Another factor to consider is that your interest rate could be higher on a longer-term car loan compared with a shorter-term car loan. That also adds to the monthly interest expense you’ll pay.
Whether you decide to get a three-year car loan, seven-year car loan, or car loan with a term in-between those lengths, you should shop around, get pre-approved, and try to negotiate for the best rate you can get.
Compare the rates you’re offered by car dealerships to the rates you’re offered by banks or credit unions to find out which is the most competitive. Look for the APR, or annual percentage rate, for comparison purposes and make sure the loans you compare have the same terms. If you shop around before you choose the car you want to buy, you’ll be in a better position to negotiate a loan that makes sense for you.
200,000 miles—or more
The argument that longer-term car loans are always bad overlooks several important questions, including how much you earn, what your earnings outlook is, how much other debt you have and how long you plan to keep your car and car loan.
If you pay off your the loan before the end of the term, you won’t pay any more interest than you would if you had a shorter-term loan, except for the higher interest rate. If you expect your income to increase or you anticipate a financial windfall, paying off your car might be priority for you.
Moreover, some cars can last 200,000 miles.
How long your car lasts depends on how well you maintain the car, how much you drive, driving and climate conditions and whether the car is involved in any accidents, according to Consumer Reports, which publishes car quality and value ratings for consumers.
If you drive a lot—say, 100,000 miles a year, 200,000 miles is only two years of mileage. But suppose you don’t drive much, maybe just 20,000 miles a year. In that case, it could take you 10 years to drive 200,000 miles.
Of course, not all cars last that long and not everyone wants to keep the same car for that many years.
Your car’s residual or trade-in value down the road is another factor to consider in whether a longer-term car loan makes sense for you. In the typical case, a car loses about 55 percent, or more than half, its value with the first five years and 68 percent of its value within the first seven years of its life, according to Edmunds.com.
That means your car could be worth less than the amount you own on your loan at some point, and if you sold it, you’d still owe more money to pay off your debt. If you wanted to buy a new car, you probably could add that amount into your next car loan, so you wouldn’t have to pay it in cash.
The bottom line is that a longer-term car loan might—or might not—make sense for you, depending on your personal situation. Do the math and shop around for the best auto loan rate before you decide.
Marcie Geffner is an award-winning reporter, editor, writer and author covering a number of topics including real estate, mortgage and banking. She is currently a full-time freelance reporter. Marcie is a former board member of the National Association of Real Estate Editors and remains an active organization member.
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