By Katrina Lewis / 10/18/2023 / Your Money
Whether it’s an SUV for a growing family, a powerful work truck or a sleek EV, when it comes to purchasing a new vehicle, buyers tend to know what they’re looking for. But beyond curiosity on safety features or fuel efficiency, one question often seems to be the tiebreaker: How much will the payment be?
For a variety of reasons, many buyers are exploring long-term auto financing to reduce the cost of their monthly payments. Is this an option for you?
What is long-term auto financing?
For years, auto financing contracts were written with monthly payments typically distributed over a four-year time frame. Now, consumers can stretch payments over five, six and seven years. There are even specialized options where contract terms are written for 96 months, totaling eight years of payments.
Obviously, making payments over these extended time frames can lower monthly payments. Which, on the surface, sounds great. But consumers should consider other factors as well because a small monthly payment may come with additional unexpected expenses.
An increase in popularity
Long-term financing has become more popular, and there are several reasons why.
Though the average price of a vehicle has slightly declined, it’s still considered relatively high at just over $48,000. With a price point like this, today’s higher interest rates and several years of auto supply chain issues, it’s easy to see why more consumers are exploring this option.
Another factor? Average car payments have also increased, making long-term financing more appealing to some. In the first quarter of 2023 for example, the average new vehicle payment was $725. This is a significant increase of 11.5% from the previous year.
Pros of long-term auto financing
Beyond minimized payments, consumers can reap other benefits of long-term auto financing.
- Lower down payment – For those who would rather not pay a larger down payment, but have no problem making a monthly payment, purchasing a vehicle with long-term financing could mean a lower down payment requirement.
- Larger loan amounts – A consumer with a smaller vehicle budget may find long-term auto financing as an avenue to getting a more expensive vehicle. Since payments are made over a longer period of time, finance companies may approve a higher financing amount, equaling more buying power.
- Higher value vehicle – Because monthly payments are made over a longer time frame, consumers may be able to upgrade their vehicle purchase to include added features and trim levels, for example.
Cons of long-term auto financing
Long-term financing has its benefits, but there are other financial implications to be aware of before entering into a long-term agreement.
- Vehicle depreciation– This is the rate at which a vehicle loses value over time. New car values depreciate around 20% in the first year of ownership (and steadily decline after that). The longer you finance your vehicle, the more value it loses. This can lead to negative equity.
- Negative equity – Sometimes referred to as being “upside down” on a vehicle, negative equity happens when more is owed on a vehicle than its worth. With long-term financing, if a buyer ever needs a different vehicle before the end of the contract, any negative equity could impact the purchase and financing of a second vehicle.
- 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. And a higher interest rate means that you will pay much more for a vehicle over the life of the retail contract.
Is long-term auto financing best for me?
Buying a car should be an informed decision. Understanding the factors that could impact your payment is one of the best ways to be prepared and make for a smoother process.
Your budget, credit rating, vehicle type and income should all weigh into your decision to explore long-term financing. Ultimately, it comes down to deciding whether having a smaller payment outweighs any additional finance costs over the years. The great part is there is no wrong or right answer. Simply do what’s best for you.
KEYS® by GM Financial provides a free Car Buying Course to help guide you when it’s time. You can also use the Payment Calculator to estimate your monthly payments.
By Katrina Lewis, GM Financial
A fan of suspense novels, food trucks and pop culture, Katrina Lewis is passionate about writing to educate and inform, especially when it comes to finances and customer options when leases or contracts are ending. A “boy mom,” Katrina loves playing monster trucks with her son, random day trips and venturing out to various festivals with her family.
Ready to get in the driver's seat?
See if you prequalify for financing.
Apply Now
FAQs
With more time for interest to accrue, you will pay more
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.
What is the advantage of a long term auto loan? ›
Monthly Payments
More time means more time to pay the loan off, and lesser burden on you upfront. You can use this benefit in your favor to achieve further benefits like buying an even expensive car, because the payments wouldn't be as astronomical as they would be for a shorter period.
Why shouldn't you finance a car for more than 4 years? ›
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.
Is it smart to finance a car for 84 months? ›
In most cases, getting an 84-month car loan isn't the best option. While a long-term loan can keep your monthly payments low, these loans are often more expensive over time due to interest fees.
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 are the disadvantages of long term financing? ›
You'll likely have to pay a higher interest rate.
A longer term is riskier for the lender because there's more of a chance interest rates will change dramatically during that time. There's also more of a chance something will go wrong and you won't pay the loan back.
What is the best term length for car finance? ›
NerdWallet typically recommends keeping auto loans to no more than 60 months for new cars and 36 months for used cars — although that can be a challenge for some people in today's market with high car prices. Ultimately, choosing the best auto loan term depends on balancing cost, affordability and your specific needs.
Are 72-month car loans bad? ›
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go. You can learn more about car loans here.
What is a good interest rate on a 72-month car loan? ›
An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 6 year term will have a monthly payment of $483. In total, the loan will cost $34,787 with $4,787 in interest.
When should you not finance a car? ›
However, they're not always a good idea when looking to buy a car.
- You can't afford the car. ...
- The interest rate is too high. ...
- You could be stuck with a long term. ...
- You want to build more credit. ...
- You are planning to use your cash reserves to buy the car. ...
- There is a deal on financing.
According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense! Make sure to consider fuel and maintenance expenses. Make sure your car payment does not exceed 15%-20% of your total income.
How long is too long to finance a car? ›
You can finance your car for as little as a few months to more than 84 months—or seven years. The most common length is 72 months—or six years—followed by 84 months. The longer your loan term, the lower your monthly payments, but the higher the overall interest.
How old of a car should you finance? ›
However, lenders and banks typically follow common guidelines, especially as it relates to age and mileage. For example, you usually can't finance a used car older than 10 years with a five year loan. Similarly, you might not be able to finance a car with 150,000 miles for more than three years.
What are the biggest disadvantages of financing a car for 5 years instead of 3 years? ›
Drawbacks of long-term car loans
- 1 - Higher interest charges. Longer loans often come with higher interest rates than shorter-term loans. ...
- 2 - You may owe more than the car is worth. ...
- 3 - Unexpected expenses over the length of the loan. ...
- 4 - Car depreciation.
Interest charges — ripping off the Band-Aid
The downside to choosing a personal loan with a longer repayment term is paying more in interest charges over the life of the loan. Since lenders charge interest payments monthly, a longer loan term inherently means more interest payments.
What are the disadvantages of long term debt? ›
A major drawback of long-term debt is that it restricts your monthly cash flow in the near term. The higher your debt balances, the more you commit to paying on them each month. This means you have to use more of your monthly earnings to repay debt than to make new investments to grow.
What is the disadvantage of getting a loan for a used car? ›
Used cars can be a good fit if you're on a budget and they generally cost less to insure; however, interest rates for used car loans are often higher than for new car loans. A pre-qualification may make it easier to compare different loans and to negotiate rates and other features when you're finally ready to buy.
What are the disadvantages of paying off a car loan early? ›
- You may face prepayment penalties.
- Your credit score may temporarily decrease.
- You may have less money for other goals like investing.
