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4 minutes read. Published 30 January 2023

Writen by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the ins and outs of securely using loans to buy the car they want.

Editor: 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 the confidence to take control of their finances with clear, well-researched information that breaks down complex topics into manageable bites.

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A car purchase is more than just deciding to purchase an SUV or a sedan with red or black. If you’re purchasing the vehicle through a loan and you’ll need decide on what repayment terms make the most suitable for your financial and budget goals. The cost of cars is still high in comparison to the time before the COVID-19 pandemic. The median price of a new vehicle during December 2022 was more than $49,500 — five percent more than the same month a year prior and over 20 percent higher than in December 2020 . The longer your loan period — generally ranging from 24 to , or two to seven years — the cheaper your monthly payment will be. But be aware that the lower your monthly payments have negatives, and could cost you more over the long term. For the majority of drivers, a long-term car loan is not a great choice. The reasons to stay clear of the long-term car loan The longer-term loans are appealing because the monthly installments will be lower than those of the shorter-term loan. Although they permit you to purchase a higher-priced vehicle, they also make the payments affordable, long-term car loans can put you in a worse spot financially If you’re not careful. The more likely you are to be upside down on loan The longer loan term means you are more likely to become upside down at some point in the future. Being upside down on an auto loan means you have more debt than your car is worth. This is because a larger portion of the monthly payments at the beginning of the loan will be used to pay interest rather than the principal amount owed. In the event of an upside-down loan, it can cause danger for many reasons. If you were to have an accident in which the car is considered a total loss, you could end up still paying off the loan on a vehicle that is no longer able to drive, if insurance isn’t covering the cost. Additionally that the longer you’re upside down on the car loan, the longer you’re suffering from negative equity. Selling a car with negative equity could mean that you will not be able to pay off the loan and you may even need to take out. Depreciation of vehicles is less of an issue with used cars since a during the initial few years. But, long-term loans on cars that are used aren’t the best idea. A car that is used likely has a significant number of miles, and a longer-term car loan allows the miles to accumulate even more. As an example, suppose you purchase a vehicle that’s three years old with 36,000 miles that’s what the average American will drive for that length of time. If you get a six-year loan and you drive 12,000 miles annually, the norm in America, you would add 72,000 miles. This means that your vehicle has 108,000 miles on it and will be nearing 10 years old by the time it’s fully paid off. If you opt to sell it earlier, you may find it’s not worth the money or, worse, you have no equity at all. More interest Longer-term durations usually come with much higher . This is generally because longer loans are more risky for lenders. With a longer loan term you are more at risk of things could impact your financial situation prior to the loan is paid back in full. Even if the interest rate for a long-term loan is similar to a shorter term however, you’ll still have to be paying more interest over the course of the loan due to the fact that you’ll be making interest payments for a longer time. Although your wallet might be relieved by the lower cost, the price may not be worth the cost. This is an especially important aspect to consider since you consider that the 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 average new loan price for the year 2022 was 5.16 percent . However, rates ranged from 3.84 percent to those having the best credit scores to 12.93 percent for borrowers with the weakest or the least subprime scores. Stuck with the same vehicle When you sign an auto loan that’s as long as 84 months, be sure that you’ve thought about whether you’d like to drive the same vehicle throughout the entire term. Seven years is a long duration. Your requirements and needs might change. But, with a long-term loan you’ll remain in the same vehicle. And in most cases it is the case that extending the loan will cost you money. Alternatives to a longer-term car loan There are other alternatives to obtain a vehicle without agreeing to the risk associated with a long-term auto loan. Rent a car If you’re struggling to get approved for an affordable loan You may be able to lease a car . leasing can help you pay lower monthly payment. Even those with good credit are more likely to receive approval for a lease and be driving an extremely new car. The disadvantages of leasing should be take note of. They include limitations on the number of miles you can drive the vehicle during the lease term and charges in excess wear and wear and tear. Most important is that you’ll have to either or return the car at the lease’s conclusion. Find a co-signer good credit provides potential lenders with additional confidence that you will pay off your loan. This increases the likelihood to be approved even if your credit is imperfect. Make a high down payment If you want to reduce your monthly expenses and save money, a high down payment is a great alternative. The greater the amount you deposit initially then the less the monthly cost will be. You are also likely to get better rate from the 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. Although the lower monthly cost for a long-term auto loan might seem appealing initially, it’s best to save extra cash to make the down payment or choose a car that is less costly, so the monthly payment is affordable for a shorter loan. The bottom line Before signing to a long-term auto loan, consider the downsides. In addition to costing you more over the term of the loan and a possible risk of in a position where you’re upside down on the loan . Additionally, your vehicle requirements could change within five to seven years when you’re still paying off that loan. Consider the alternatives to long-term loans, such as making a bigger down payment, leasing a vehicle or finding a co-signer whose credit score can help you obtain more favorable loan terms.


Writen 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 using loans to buy a car.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to take control of their finances by providing concise, well-studied information that breaks down complicated topics into bite-sized pieces.

Auto loans editor

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