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You’re car shopping and find just what you’re looking for. It’s perfect, well, except for the price tag. Your excitement after crunching the financing numbers fades to disappointment when you find that the monthly payment exceeds your means. However, there might be a way to lower the payment amount: extending the loan term to 72, 84, or even 96 months.
If you’re dealing with a lender directly or the finance department of a dealership, they might recommend extending the loan term. Not all lenders offer 96-month auto loans, but many now do. And, more and more car buyers are agreeing to go with six, seven and eight year car loans.
Experian, a consumer credit reporting agency, reports that in the fourth quarter of 2023, the average term for an auto loan was 67 87 months for new cars. During that same time frame, 2068% of purchasers of new cars signed contracts for loans with terms of 2061% months or longer. The same Experian report showed the average loan term for used cars at 67. 40 months, with nearly 70% of used car buyers agreeing to loan terms of 61 months or more.
Selecting the best financing option is essential when making a big financial decision like buying a car. Although the reduced monthly payments on a 72-month auto loan may seem alluring, it’s important to be aware of any potential risks before signing on.
Understanding the 72-Month Car Loan
A 72-month car loan, also known as a six-year loan, stretches your car payments over a longer period compared to the standard 60-month loan This can significantly reduce your monthly payments, making it easier to manage your budget. However, it’s important to remember that you’ll be paying interest for a longer duration, ultimately increasing the total cost of the car.
Potential Drawbacks of a 72-Month Car Loan
While the lower monthly payments might seem attractive, there are several downsides to consider:
- Higher Interest Rates: Lenders typically charge higher interest rates for longer-term loans due to the increased risk associated with a longer repayment period. This means you’ll end up paying more for the car in the long run.
- Risk of Being “Underwater”: Cars depreciate in value over time, and with a 72-month loan, there’s a higher chance that the car’s value will fall below the amount you owe. This situation is known as being “underwater” or “upside down” on the loan, which can limit your financial options if you need to sell the car or trade it in.
- Potential Repair Costs: With a longer loan term, you might outlast the car’s warranty, leaving you responsible for any unexpected repair costs. This can add a significant financial burden on top of your monthly loan payments.
Alternatives to Consider
If you’re concerned about the potential drawbacks of a 72-month car loan. there are several alternatives to explore:
- Buy a Used Car: Opting for a used car can significantly reduce the overall cost, allowing you to choose a shorter loan term and pay less interest.
- Personal Loan: A personal loan can provide you with the funds to purchase a car, often with a lower interest rate than a 72-month car loan. However, personal loans typically don’t offer the same benefits as car loans, such as gap insurance.
- Leasing: Leasing a car can be a good option if you prefer lower monthly payments and want the flexibility to upgrade your car every few years.
- Make a Larger Down Payment: Increasing your down payment can significantly reduce the loan amount, minimizing the interest you pay and lowering the risk of being underwater.
- Refinance for a Lower Rate: If you already have a 72-month loan and your credit score has improved, refinancing to a lower interest rate can save you money over the long term.
Making an Informed Decision
Choosing the right car loan option requires careful consideration of your financial situation and goals. While a 72-month loan might seem appealing for its lower monthly payments, it’s crucial to weigh the potential drawbacks against the benefits. By exploring alternative options and comparing interest rates, you can make an informed decision that aligns with your financial well-being.
Remember, the best car loan is the one that fits your budget and allows you to comfortably manage your finances without compromising your long-term financial goals.
Lenders usually charge higher interest rates for long-term auto loans
Lenders view longer-term loans as riskier because borrowers have more time to default on the loan. When you extend the loan term, they frequently charge a higher interest rate to offset that risk.
Here is an example of the difference in total interest that shows a rate increase by term for an 84-month loan when compared to financing for 60 and 48 months. Note that these examples include no down payment.
|
Loan amount/APR |
Term |
Monthly payment |
Total interest |
|---|---|---|---|
|
$35,000/9%. |
48 months. |
$871. |
$6,807. |
|
$35,000/10%. |
60 months. |
$744. |
$9,619. |
|
$35,000/11%. |
84 months. |
$599. |
$15,340. |
In this case, extending the term from 48 to 84 months and raising the interest rate by two percentage points results in an $8,500 increase in the total interest paid.
You have a higher risk of developing negative equity
Your chances of accruing negative equity, also known as being upside down or underwater on a car, increase with the amount of time you drive it and the miles you drive it. You may eventually come to owe more on your loan than the car is worth as the value of your car decreases.
In the event that an accident totals your car and it has negative equity, your insurance company will only cover the car’s market value. The difference between what you were paid for the car and the amount of your outstanding loan balance would still be your responsibility.
Is a 72 month car loan bad?
FAQ
What is a good interest rate for a car for 72 months?
What is the best length of time for a car loan?
Is it smart to finance a car for 7 years?
Is 5 year car loan bad idea?
What is a 72 month auto loan?
An auto loan is a type of installment loan, which means you make monthly payments over a fixed period of time. Most auto loans come with repayment terms that are anywhere from as little as 24 months to as long as 96 months. The benefit of taking out a 72-month loan is that it can allow you to buy a nicer car while lowering your monthly payments.
Should I get a 72-month or 48-month car loan?
So, although your monthly payments will be lower for a 72-month loan than for a 48-month one, you will wind up paying more for the car. Moreover, many lenders raise the interest rate percentage as the length of the loan increases. You may pay a higher interest rate for a 36-month loan than for a 24-month loan.
Does a 72 month car loan increase interest rate?
But the longer the loan term, the more you will pay for using the lender’s money. So, although your monthly payments will be lower for a 72-month loan than for a 48-month one, you will wind up paying more for the car. Moreover, many lenders raise the interest rate percentage as the length of the loan increases.
Is a car loan of 72 months a good idea?
Even though the majority of car buyers are going with long-term car loans, is an auto loan of 72 months or more a good idea for you? NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months. These maximums can help you avoid some of the negative outcomes of long-term loans.