Taking out a 72-month auto loan can make sense in some situations, but most financial experts don’t consider it a good idea, generally speaking. Next up are three major drawbacks of a 72-month loan. Cars depreciate in value over time. Depending on your initial loan amount, interest rate and how quickly and much your car depreciates, the amount you still owe on a 72-month auto loan might come to exceed the car’s resale value. This is what’s known as being “underwater” or “upside down” on the loan, or having negative equity.1. You May End Up Underwater On Your Loan
New cars depreciate especially quickly, losing a lot of their value within the first couple of years. Some experts say a car loses 10% of its value the moment you drive it off the lot. Depreciation rates differ by car, so your vehicle could lose its value even faster.
If you do decide to take out a 72-month loan, it may be a good idea to purchase gap insurance, which covers the difference between the car’s depreciated value – the amount your car insurance provider would pay – and what you owe on the vehicle if it’s totaled, damaged or stolen.
2. 72-Month Car Loan Rates Are Typically High
Lenders typically believe that borrowers who take out a loan with a longer repayment term are more likely to default on the loan. To offset the added risk that lenders tend to perceive, they may charge a higher interest rate or annual percentage rate (APR) than they otherwise would. A high interest rate means you’ll end up paying more for the total cost of the car when all is said and done and you’ve made all your loan payments. Paying more money in interest has no benefit, and some people consider it to be wasted money.
3. You May Have To Pay For Car Repairs While Still Paying Your Loan
If you take out a long-term auto loan, your repayment term could be lengthier than the car’s warranty, leading to financial problems if you have to cover repair costs out-of-pocket while still making car payments.
For instance, let’s say the warranty lasts 60 months but your car loan has a 72-month term. When the warranty ends, you may have to pay for a major car repair on top of your monthly car payments. Fortunately, many auto repair financing options are available if you find yourself in this situation and need a little extra help, but the downside of this strategy is that you may have to pay repair financing costs in addition to your car payment.
