With the average price of a new car now topping $50,000, more buyers are stretching out their loan terms to lower the monthly payment.
The average loan length is now 69 months, with the share of 84-month loans at 22% — a record high, according to data from automotive research firm Edmunds. A 60-month term is Edmunds’ recommended cap, but that’s become less realistic for many buyers dealing with higher prices that have made shorter terms harder to afford.
While longer loan terms can keep monthly costs down, they can also end up costing more overall and come with other downsides worth considering. Here’s a look at some of the trade-offs.
Higher overall cost
Stretching out a car loan term can lower the monthly payment, but it also raises the total amount of interest you’ll pay. For a $50,000 new car with a 10% down payment and the current average percentage rate of 7%, the added cost looks like this:
48 months: Monthly payment of $1,078 and $6,724 in total interest60 months: Monthly payment of $891 and $8,463 in total interest84 months: Monthly payment of $679 and $12,050 in total interest
An 84-month loan term ends up costing $5,326 more in interest than a 48-month option.
While this example uses a single APR for comparison, it’s important to consider that the annual percentage rate for longer loans tends to be higher than shorter loans, says Ezra Peterson, vice president of auto app Way.com. It’s “often nearly a full point and a half higher,” he says.
Another risk is that “setting a budget based on monthly payments enables buying more car than people actually need,” says Justin Fischer, an automotive analyst at CarEdge.com, a car-shopping website. By only focusing on the monthly cost, buyers might overlook how quickly the total interest adds up.
You’ll be in debt longer
A longer loan term can leave less room in your budget down the line, especially since you may not know what your expenses will look like by the time the loan is halfway paid off.
“The longer time in debt is my biggest concern,” says Robert Persichitte, a certified financial planner at Delagify Financial. “When you are still paying off a car long after the warranty expires, you are at risk of paying for repairs and other issues while still paying off your car. That one-two punch is going to be a big hit for most budgets.”
A long payoff timeline also means you have less flexibility if your income changes, if you need to replace the car sooner than expected or if other financial needs come up.
Depreciation is a bigger risk
New cars depreciate quickly, which can create added risk for buyers with longer loan terms.
If you need to sell the vehicle after it has lost value, or you “total the car in an accident in the first few years of a 72-month loan, insurance coverage or sale proceeds may not cover the remaining balance,” says Fischer.
While gap insurance — which covers the difference between a car’s value and what’s left on the loan — can help offset the cost, “in some situations, this leaves drivers owing money on a car they no longer drive,” Fischer says.
By extending the loan term, a longer payoff period can “increase the window where borrowers are underwater,” Fischer says.
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