What are the risks of a long-term auto loan?

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 .

What is a disadvantage of paying for a car with a long-term loan?

Higher interest – Vehicles purchased with long-term financing typically come with lower monthly payments but possibly a higher interest rate. Auto finance companies set interest rates based on the level of risk and consider long-term loans riskier than others.

Is it better to have a longer car loan term?

Key takeaways. A longer loan term means you'll get a lower monthly payment, but you'll also pay more in interest. A shorter loan term is better, as it helps minimize borrowing costs and the risk of being upside-down on your loan .

Why are longer car loan terms a potential issue?

Drawbacks Of Long Car Loan Lengths Long loans have more time for interest to accrue, and they tend to have higher interest rates overall . The longer term means your vehicle will likely depreciate before you pay it off, and you might have to pay more than it's worth.

Why You Should Avoid Long-Term Auto Loans (2024)

Long-term auto loans are becoming more popular as people look for options to get them into the cars they really want. Loans that stretch 84 months—or even longer—are increasingly common. But is getting a long-term auto loan really a good idea? There are several reasons why taking out an auto loan of 84 months or longer may not be a smart financial move. Here's what to know.

Auto Loan Debt Is Rising

Since 2009, auto loan debt has risen by 81%; it's now the third-largest type of consumer debt, according to Experian data. All told, Americans owe more than $1.3 trillion in outstanding auto loan balances.

The growth in auto loan debt is partly a result of rising vehicle prices. In the first quarter of 2019, the average loan for new passenger vehicles hit a record high of $32,187, Experian data shows. More than 85% of new cars are financed, with the average monthly payment topping $500.

As auto loans get larger, consumers are increasingly stretching out their loan terms in an attempt to make their monthly payments more manageable. According to Experian, in Q1 2019, the number of new loans with terms between 85 and 96 months for new passenger vehicles rose 38% compared with Q1 2018.

Why Long-Term Car Loans Aren't a Good Idea

Long-term car loans may be popular, but that doesn't necessarily mean you should get one. Here are the downsides of long-term car loans:

You'll Pay More Interest

A long-term car loan means smaller monthly payments, but payments aren't the only factor to consider. When taking out an auto loan, you should also consider the loan's interest rate. Long-term car loans typically carry higher interest rates than shorter-term loans. And even if you can find a long-term loan with a low interest rate, making payments for seven or eight years will likely add up to more interest over time compared with a shorter-term loan.

You Could Owe More Than Your Car Is Worth

Even if you don't mind spending an extra $5,000 for your new car, being "upside down" on your car loan is a real risk. When you owe more on your loan than the vehicle is worth, you have no equity in the car—in fact, you have negative equity.

In this situation, if you try to sell the car, or if it's totaled in an accident, the money from the buyer or insurance company won't be enough to pay off your loan balance. You'll have to keep making payments on the loan after the car is gone—on top of any possible payments for the car you'll need to replace it.

Also consider that as your car ages, it's likely to need more costly repairs. Most manufacturers' warranties expire after three to five years, so you could end up spending thousands of dollars out of pocket just to keep your car running.

You Might Have Trouble Making Loan Payments

Your financial situation may change quite a bit over seven or eight years. Ideally, those changes will be for the better—but what happens if you lose your job, are hit with a major medical bill or want to start saving for a home? Being tied to a car loan for eight years can make it difficult to save for other financial goals. If your finances take a downturn, you might struggle to keep up your car payments, which may hurt your credit score or lead to your car being repossessed.

Alternatives to a Long-Term Auto Loan

Fortunately, a long-term car loan isn't your only option for getting the car you need. There are several alternatives that make more financial sense.

Save up for a bigger down payment. The more money you can put down when you buy a car, the less you will need to borrow. A smaller loan means smaller monthly payments, which can make your car more affordable without having to resort to a long-term auto loan.
Choose a different car. You might have your heart set on a new car with all the bells and whistles, but adjusting your standards a bit can make a big difference in your costs. Opting for the base trim or a less-expensive model in the same line may be enough to reduce the price to a manageable level.
Consider a used car. Opting for a late-model used car is another way to avoid long-term auto loans. You can find gently used, certified pre-owned cars at many dealers, often with warranties and other perks thrown in. Just keep in mind that interest rates on used car loans tend to be higher than those on new car loans.
Lease instead of buying. Are you determined to drive a brand-new car? Leasing offers a way to do so with a smaller down payment and monthly payment compared with buying the same vehicle. However, leasing comes with many restrictions, fees and potential penalties—and at the end of the lease, you won't have anything to show for the money you spent. Depending on your needs, leasing may or may not be a good idea.

How Your Credit Score Affects Your Auto Loan

Is your credit score the only thing standing between you and your dream car? Having poor credit may make it harder to get an auto loan or may limit your options to high-interest loans. A FICO® Score☉ of 670 or above is considered "good" and can open the door to a car loan with a better interest rate (and lower monthly payment) than you'll get if your credit is only fair.

Before you start shopping for auto loans, check your credit report and get a free credit score to find out where you stand. Even if your score is good, why not aim for "excellent"? For example, those tempting 0% interest auto loan offers are typically reserved for those with the best credit scores.

You can improve your credit score fairly quickly by practicing these positive financial habits:

Pay down existing debt, such as credit card balances.
Avoid taking on new debt or applying for credit cards.
Pay all your bills on time.

Signing up for Experian Boost^®^ø can be another quick way to improve your credit scores. This free service gives you credit for on-time phone, utility and Netflix^® bill payments, which don't normally show up on your credit report.

The Long-Term Results of Long-Term Car Loans

Long-term auto loans lasting 84 months or more may seem like a great way to get your dream car for less. But in the long run, those lower monthly payments come at a steep cost. At best, a long-term auto loan means paying thousands of dollars more in interest over the loan term. At worst, it means owing more than your car is worth, which could put you in a precarious financial position. Improving your credit score, making a bigger down payment or choosing a less expensive car are smarter ways to get the car you need without getting in over your head financially.

Why You Should Avoid Long-Term Auto Loans (2024)

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