How Long Should My Car Loan Be?

Edmunds.comEdmunds.com Member, Administrator, Moderator Posts: 10,135
edited April 2017 in Editorial
imageHow Long Should My Car Loan Be?

A longer car loan may have lower payments, but will it save you money in the long run?

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Comments

  • karhill1karhill1 Member Posts: 164
    Many people could benefit from a loan with a long pay off period.

    If an OEM offers a loan for 36 to 60 months at 1.9 percent, or perhaps zero percent, it may be best to take the 60 month loan. With a bit of discipline a person can always pay the loan off early with no penalty.

    Having a lower required payment or having required payments which are made in advance can be very helpful should a short term monetary situation develop.

    The amount of equity a person has in a vehicle is dependent on the amount of money a person has paid on the down payment or payments made on the financed amount. With a low interest rate, it really makes no difference whether the equity is paid up front or later.

    For some folks having the cash available, which would have been used to make a large downpayment on a vehicle, can be very useful as the interest on auto loans is typically far less than the interest rates available elsewhere. A person could use the money saved from the large down payment to pay off other high interest debt.

    Each person's situation is unique and there is really no single financing rule for car purchases.
  • texasestexases Member Posts: 9,579
    Boy, this sure attracted the SPAMMERS! There's a big difference between 'can' and 'should'. To keep one's finances under control, short loans (36 month or so) and long car ownership (10 years or so) are best. Combine that with a 20% or so down payment, and folks won't be under huge financial pressure. They also won't be driving the 'car of their dreams', probably, but that's ok. Really, it is!
  • kyfdxkyfdx Moderator Posts: 190,936
    Yeah.. wonder what they search for to find finance discussions... weird.

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  • jraserojrasero Member Posts: 12
    There are such things as 6+ loans but I would highly advise from taking one of these. Instead 5 years max. Also try to take a 36 month or less loan. A lot can happen even in 3 years. Also the general rule is 20% down but if you want lower payments or enjoy trading in and getting a "new" car paying a larger down payment upfront will allow you to create equity faster thus allowing you to get out of your old car quicker.

    There are instances where taking a 6 year loan makes sense. One being 0% financing. In a situation with 0% APR you could pay more than your monthly when you choice to payoff the loan faster.

    An alternative to long term longs would be leasing. Now with leasing you have to drive 15k or less a year and take very good care of the car maintenance and cosmetically. If you fit this bill leasing with little or zero down can get you into a brand new car for less a month compared to financing. The long term option of the lease would be turning in the car and getting another 24-36 month lease or buying your end of lease car for the residual value. Now leasing a car and then buying it always will be more money than straight financing it but this allows you to keep your cash flow under control.

    Lease
    2016 RDX AWD Base
    Negotiated price $35,500
    $3300 down
    45k 36 Months
    Tax (NYC) tags wrapped in= $366 Month

    +

    Buy back lease after three years
    2016 RDX AWD Base
    Residual/Buyback= $23,300
    $11,000 down
    2.45% APR 36 months=$431 Month

    Leasing and buying lease 6 year cost= $42,626

    Buying
    2016 RDX AWD Base
    Negotiated price $35,500
    20% Down $7100
    1.9 APR 72 Months
    Taxes (NYC) tags wrapped in= $472 Month
    Total for 6 years= $41,084

    So leasing for 3 years, then financing for 3 years is a little more than $1500 more compared to straight 6 years of financing with 20% down. $1500 is still a good chunk of change but over 6 years that's only $250 more a month. Also, when buying your leased car you have the potential to avoid millage overages and damage charges and you know 100% the cars history compared to buying used. Obviously these numbers are unique to my location and situation, but this could be applied to most cars.
  • isellhondasisellhondas Issaquah WashingtonMember Posts: 20,350
    36 month car loans used to be the norm. Then they crept up to 48 months. Some froends of my parents bought a new T-Bird when I was a kid and financed it for 48 months. My parents thought they were nuts.

    Now, 60 month loans seem to be the norm with some people financing for 72 and even 84 month loans!

    To me, they are buying cars they simply can't afford. I used to try to talk people out of these long term car loans but they wanted it all! They HAD to have the top of the line model with every unnecessary option and the only way they could afford the payments was to stretch out the payments.

    I suppose since cars last so much longer these days it's not as bad as it once was.

    I still remember that T-Bird was pretty shot after those four years and 80,000 miles. Back in the 60's, if a car went that long without major work it was unusual.
  • steverstever Guest Posts: 52,457

    I suppose since cars last so much longer these days it's not as bad as it once was.

    That's about the only saving grace but I really hate the idea of car payments. At least with my house, there's a chance I'll get some of my payments back some day.
  • TitleLoanscTitleLoansc 3420 US-21, Fort Mill, SC 29715Member Posts: 6
    Hy,
    The main reason is that if you wants to paying long term car loan. you 'll pay more interest of it.
  • CarloanguruCarloanguru Member Posts: 1
    Great topic. What most people dont understand is how contracts work . Yea dont get into a long term loan because if you plan on sticking to the very end you'll end up paying a lot in interest payments .
    That's the mentality of most people who have very little clue on contracts or have no idea on accelerate a contract. Which is why the uneducated car buyer end up in digging them selves in a huge financial whole when they try to trade in their vehicle in a short period of time. It's really painful stupidity that leads to a repo soon after. Prices of vehicles have jumped over past few years and have become expensive .
    My best advice is learn how to circumvent the vicious cycle people put them selves in with car purchase. How you ask? It's the opposite of this bloggers advice to uneducated. Go with the 72 months payment because it's easier to manage but dont go higher. The worst thing you do here is take it to the end of full term. You make your normal contract payment each month. Then right after you do, if you have an extra $25,50 a $100 make a payment toward the principal balance. Now the mistake that the uneducated make is they lump the extra money together with their regular monthly payment. Huge mistake !
    By doing so your helping the banks payoff your interest. That's how the banks make their money. To truly accelerate your loan you need to call the bank and let them know the extra payment is strictly for the principal balance only. By knocking down the balance you can pay off the loan not 6 years but maybe 4 or 3 years if your aggressively paying more towards the principal balance. Its a simple interest loan and there are no pre payment penalties. If you get to pay off your car in 3 short years your at least break even or may have some equity value in your car.
    In the long run your avoiding paying more interest if you were to stick to the loan towards the end.
  • ess5532ess5532 Member Posts: 1
    edited April 2020
    What if the terms of the loan are 72 to 84 months 0% interest?? How do they factor what your monthly payment is if the interest rate is 0%. And is it a good idea to finance with these terms. Also what does your credit score need to be to qualify? 700s or 8
  • MichaellMichaell ColoradoModerator Posts: 186,304
    ess5532 said:

    What if the terms of the loan are 72 to 84 months 0% interest?? How do they factor what your monthly payment is if the interest rate is 0%. And is it a good idea to finance with these terms. Also what does your credit score need to be to qualify? 700s or 8

    Divide the loan amount by the loan term to calculate the monthly payment for 0%.

    There are lots of opinions about 72 and 84 month loan terms. For most vehicles, you will be under water a longer amount of time - if not the entire loan term, depending on what vehicle you select.

    Each manufacturer sets their own credit thresholds for 0% qualification - generally 700-740 or higher qualifies.

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  • Jeff_in_VegasJeff_in_Vegas VegasMember Posts: 1
    I agree with jrasero. He meant to say "...that's only $250 more a YEAR", not "$250 more a month". The math works out as he says when you replace that word.

    I have leased a vehicle 4 different times now, each time with the same basic thinking that he has, which is :
    Although I am "wasting" around $250 per year, I get the privledge of the lower monthly payments on the front end of this 6-year time span, and I know that if it ends up being a "bad relationship" with this vehicle at the end of the 3 year lease, I can get rid of it and move to something else. More of my money is liquid, so I can invest what I'm not spending for this vehicle in other things, and maybe they pay a higher interest rate than this vehicle is costing me ;-). If however, the vehicle is still a "good fit" after 3 years (a lot can happen in 3 years- Corona Virus, divorce, etc), then I can choose to buy this used car (that ONLY I HAVE USED), knowing exactly what has happened to it in the past 3 years. It's nice buying a used car, knowing that nothing weird happened to it before you got it.

    Each of these 4 times that I have leased, the vehicle was a good vehicle, and I would have kept it, except that my life had changed a lot in the 3 years, and there was another vehicle out there that was a better fit for myself and my family, so I moved to something that was a small SUV, or something more luxurious, or something larger, safer, more versatile.

    The lease for the vehicle that I'm driving right now (leased vehicle #4,) will end soon, and because of Corona Virus, used vehicle values are tanking, so I will step out of this one, and the manufacturer will take a hit on this vehicle, because they will end up selling it for much less than the Residual Value that their computer algorhythm had come up with years ago. I would be a fool to pay the RV that is in the contract, because all used vehicles have lost a lot of value just recently. Instead, I can walk away, and go look for a great deal from some dealer that is on the brink of bankruptcy. If I had PURCHASED this car, then it would be ME holding the bag right now, instead of them. Everyone out there who is making payments on a car purchase : you just took a hit. The value of your car just dropped, but your lender is not going to lower the amount that you owe them. When you sell or trade in the car, you will likely get less for it than what the market would bear 3 months ago. It's just like when you are paying on a house, and the housing market drops.
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