Back in the day, a 48-month auto loan was considered a long-term loan. Compared to today’s long-term loans, 48 months don’t seem that long. These days, most car buyers prefer to extend their repayment period to 72 or 96 months.
If you are planning to finance your next auto purchase, you should think twice about jumping on the extended auto loan bandwagon. Long-term loans may seem like a good idea initially, but there are reasons experts advise against them.
Advantages of Long-Term Auto Loans
The main advantage of long-term auto loans are low monthly payments. Stretching out the repayment period allows a car buyer to have a more affordable monthly payment. In a time when car prices continue to increase (and in a state where car ownership costs are high), consumers try to make auto loan repayment manageable by divvying up the overall cost into more monthly installments.
Consequently, long-term car financing allows consumers to purchase more expensive vehicles. Longer-term loans enable buyers to finance cars they probably couldn’t afford with a shorter-term loan. The loan doesn’t make the car more affordable, but it makes repayment easier on the budget.
Disadvantages of Long-Term Auto Loans
The main disadvantage of longer-term auto loans is negative equity. A longer term will cause a car owner to be upside down in the loan and for a longer period of time. A vehicle is an expense, not an investment. The asset depreciates fast, losing as much as 18 percent of its value in the first year of ownership. If it takes the individual 8 years to repay the loan in full, at some point the vehicle will be worth less than the remaining balance.
Another problem with longer-term loans is that you pay more interest and you pay it first. Though monthly payments will be comparatively lower, the interest to be charged will be higher. Lenders also structure auto loans in such a way that the first couple of payments pay for interest, so it will take you some time before your payments start chipping away at your loan principal.
Long-Term Auto Loan- To Get or Not to Get
We here at Los Angeles Auto Approval Center encourage you to settle on the shortest loan term you can afford. Pay off the loan in 4 years or less. You will spend less overall because you will pay less interest, and you will not be in debt for long. You need not worry about having a vehicle whose value is less than your existing balance.
If you are considering a long-term loan because you are cash-strapped, know that such loan wouldn’t help you financially. If you need to stretch payments up to 96 months, it only means one thing: you are buying a car you cannot afford. It means the car you have chosen is too expensive and that you need to rethink your choice. Opt for a less expensive reliable car that you can afford to pay off in a shorter period of time.
Stop thinking of auto loans in monthly payments and instead look at the total cost when determining your budget. It is a wiser move to pay more on a monthly basis than pay more overall.