Should You Agree to a Long-Term Car Loan?

Should You Agree to a Long-Term Car Loan?

Posted on Thursday, December 28, 2017

How long do you want to be in the driver’s seat?

Is a long-term car loan a good idea? The payment is lower, and you plan to keep your car for a long time, right? Does the term of the loan really matter all that much? Yes, it absolutely does. While long-term car loans make sense for some drivers, there is much you need to consider before accepting one.

What Is “Long-Term?”

In the car world, anything beyond 48 months is “long-term.” The term of your loan is important because it determines your monthly payment and how much interest you pay. For example, if you bought a $20,000 car at 48-month term, you would pay $416 a month before interest and other considerations. Make that a 60-month term, and you are paying $333 a month. Appealing, right?

Ah, but consider the flipside. The price you pay for the loan, your interest, goes up since you are paying that interest rate for another year. So, your monthly payment is lower, but your car costs more. The longer the term, the more it costs.

Short-Term Thinking

It is important to approach your car purchase looking at the overall cost of the car, and what you will do with the car once you are done paying it off. After all, you are buying the car, and once you send in that last payment, it will be yours. Do you plan on trading it in and buying a new one? Do you plan on keeping it until it fails an emissions test or the tires fall off, whichever comes first? That will have an impact on your purchase.

Suppose you plan to trade it in. Ideally, you will have your car fully paid off before you trade it in, but with a long term, that means you will have to wait longer and your car will be worth less when you go to buy a new one. You need to look closely at how your car will depreciate over time to make that call.

Your long-term loan may make you see your car differently.

Secondly, you need to look at how much extra money it will cost you. Cars are a depreciating asset; that is, the longer you own them, the less they are worth. So you want to keep the price you are paying for the car down, and interest is a part of that. Any long-term loan needs to have the lowest interest rate you can get to truly be worth it, and unless you have spectacular credit and shop around for financing, that can be very hard to find.

Finally, you need to think about the unexpected. What happens if, 36 months into your 72-month term, your car gets totaled? Will you be able to afford a car at all, after you have paid off your loan? Will that cause other financial problems?

Sometimes a long-term loan makes sense. Perhaps you need to fit a payment into your budget and the loan term does that. Perhaps you are simply going to drive your car until it falls apart. But like any form of car loan, long-term loans are tricky and need to be treated with care. To learn more about financing and loans, check out the research from CarFoundMe!