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You’re car shopping and find just what you’re looking for. It’s perfect, well, except for the price tag. After crunching the financing numbers, your enthusiasm turns to disappointment when you realize the monthly payment is more than you can afford. But there could be a solution: extending the loan term to 72, 84 or even 96 months to reduce the payment amount.
If you’re working with a dealership’s finance person or directly with a lender, they may very well suggest stretching out the loan term. Not all lenders offer 96-month auto loans, but many now do. And, more and more car buyers are agreeing to go with six, seven and eight year car loans.
According to consumer credit reporting company Experian, the average auto loan term in the fourth quarter of 2023 was 67.87 months for new cars. In that same time period, 68% of new car buyers signed for loans with terms of 61 months or more. The same Experian report showed the average loan term for used cars at 67.40 months, with nearly 70% of used car buyers agreeing to loan terms of 61 months or more.
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Maximum auto loan terms: What’s recommended?
Even though the majority of car buyers are going with long-term car loans, is an auto loan of 72 months or more a good idea for you?
NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months. These maximums can help you avoid some of the negative outcomes of long-term loans.
However, as car prices have reached record highs and interest rates have climbed in the past several years, it’s become more challenging for some car buyers to avoid long-term auto loans.
Why go with a long-term car loan?
Some car buyers do have legitimate reasons for choosing a long car loan, such as in the following situations:
It’s the only way to buy a car
In today’s car market, some people simply can’t afford the payment when financing a car for 60 months or less. Also, in some cases, car buyers with poor credit can only qualify for a long-term car loan. Agreeing to a long-term car loan may be the only way to obtain a car for critical needs, such as getting to work.
Your good credit earns a very low interest rate
Special low APR offers aren’t as common in today’s market, but a small percentage of car manufacturers are still offering them, usually only to borrowers with good or excellent credit.
If you qualify for a special rate, for example 1.99% APR for up to 72 months, you could make a large down payment to shorten the loan length. However, with such a low rate, it could make sense to use the down payment for paying off higher-interest loans and credit cards.
Long-term auto loans can have positives and negatives. To determine if going beyond 72 months is a good idea for you, weigh what you have to gain against what you stand to lose.
Reasons to avoid long-term car loans
1. With more time for interest to accrue, you will pay more
Upfront, a long-term car loan may seem like a good deal, because monthly payments are lower when compared to a shorter-term loan. In the long run though, you’ll pay more total interest and the amount could be significant.
Here’s an example of the interest paid on an 84-month auto loan compared to 60-month and 48-month financing, with no variation in loan amount and APR. Note that these loan examples reflect no down payment.
Loan amount/APR | Term | Monthly payment | Total interest |
|---|---|---|---|
$35,000/9%. | 48 months. | $871. | $6,807. |
$35,000/9%. | 60 months. | $727. | $8,593. |
$35,000/9%. | 84 months. | $563. | $12,302. |
Going from 48 months to 84 months increases the total interest paid by nearly $5,500.
2. Lenders usually charge higher interest rates for long-term auto loans
Because there’s more time for a borrower to default on the loan, lenders consider longer-term loans to be a higher risk. To compensate for that risk, they often charge a higher interest rate when you stretch out the loan term.
Using the example of an 84-month loan compared to 60-month and 48-month financing, here’s the difference in total interest that reflects an increase in rate by term. Note that these examples include no down payment.
Loan amount/APR | Term | Monthly payment | Total interest |
|---|---|---|---|
$35,000/9%. | 48 months. | $871. | $6,807. |
$35,000/10%. | 60 months. | $744. | $9,619. |
$35,000/11%. | 84 months. | $599. | $15,340. |
In this example, going from 48 months to 84 months — and increasing the rate by two percentage points — increases total interest paid by $8,500.
» MORE: Calculate the cost of long- and short-term auto loans
3. You have a higher risk of developing negative equity
The longer you drive a car and add mileage to it, the greater your chance of developing negative equity — also called being underwater on a car or upside down. As your car loses value, you could reach a point of owing more on your loan than the car is worth.
If your car has negative equity, and it’s totaled in an accident, your insurance company would only pay the market value of the car. You would still be liable for the difference between your outstanding loan balance and what you get for the car.
4. You could fall into a cycle of negative equity
Negative equity can also come into play if you want to sell or trade in your car before your loan is paid off. If your car has depreciated to the point where you get less for it than your loan balance, you will owe the difference.
In some cases, a dealership that’s eager to sell another car will suggest rolling the negative equity into your next car loan. So, if your negative equity is $10,000, that’s added to the amount you finance for your next car loan. The increased loan amount might cause you to again go with a long-term loan to keep the monthly payment low.
Some car buyers will roll negative equity into a new loan multiple times. Each time, the loan gets larger and becomes more difficult to pay off.
5. Repair and maintenance costs increase with a car’s age
A 7- or 8-year-old car will likely have more than 90,000 miles on it. A car this old will need tires, brakes and other maintenance — and may require unexpected repairs.
If you buy a 3-year-old car and take out an 84-month loan, the car will be 10-years-old when the loan is finally paid off. On top of your monthly payment, you could have expensive maintenance and repair costs.
» MORE: How much routine car maintenance costs
What if you already have a long auto loan term?
If you now regret going with a 72-, 84- or 96-month car loan, you might still be able to avoid some of the negative aspects of having such a long loan.
One possibility is looking into whether you can refinance your auto loan to a shorter term. If your credit has improved since getting the original loan, it’s possible you could also qualify for a lower rate.
Another option is to pay the loan off sooner than the term you agreed to. This could mean paying a little more than your required payment each month, and making sure the extra goes to paying down your loan’s principal balance. Also, if you have a lump sum of money — for example a tax return or work bonus — you could make a single, large payment to decrease your loan’s principal.
When paying off a car loan early, it’s a good idea to ask about any prepayment penalties, although most auto lenders no longer charge such fees.
