The Scary Truth Behind Long-Term Car Loans

By Michelle Lambright Black
Published on: 01/30/2020

It’s smart to try to save money whenever you can. This fact is especially true when it comes to your monthly payment obligations.

Lowering monthly bills like cable, cell phone, or insurance is a smart way to find extra money in your budget — money you can use to pay down debt or save. See our related article about how to decide which debts to pay first.

When it comes to lowering your monthly car payment however, you want to be careful. While refinancing to a lower rate can sometimes work in your favor, long-term auto financing is another story. See our related article about how refinancing can affect your credit.

Don’t let the appeal of a lower monthly payment cause you to overlook the hidden risks of this type of financing.

What is a long-term auto loan?

An auto loan is a type of installment loan. The debt must be paid back at a fixed monthly amount over a fixed period of time. Interest rates on installment loans are generally fixed as well.

Many people are familiar with the concept of 15 and 30-year mortgages. Yet the repayment terms available for auto loans can vary more. You can often find auto loans with the following repayment terms:

  • 24 Months
  • 36 Months
  • 48 Months
  • 60 Months
  • 72 Months
  • 84 Months
  • 96 Months

The average repayment term for a new car loan is around 69 months, according to Experian. (That’s nearly six years.) For used cars, the average term is nearly 65 months.

If you finance a new vehicle for longer than 60 months, your loan may be considered a long-term loan agreement. For used vehicles, financial experts often recommend sticking to a car loan term of 48-months or less.

The drawbacks of long-term auto loans

There aren’t many benefits to taking out a long-term auto loan when buying a car. Sure, if you extend your auto loan it might lower the size of your monthly payment. But the cost of that smaller payment is high. The longer your loan term, the more it will usually cost you.

The overall interest costs on long-term car loans can be significantly higher. When your loan term gets longer, the lender’s risk increases. As a result, long-term financing typically features higher interest rates, even if your credit is in good shape.

Long-term auto loans can become an issue when your loan outlasts your warranty as well. Imagine that your car’s warranty expires after five years, but you took out a seven-year loan. If your engine needs to be replaced around year six (it happens!) and you’re still making loan payments, it could be a serious financial hardship.

What is negative equity and why is it a problem?

Auto loans with lengthy repayment terms can lead to another big problem — negative equity. When you have negative equity in a vehicle it means you’re “upside down” or “underwater” on your car loan.

In other words, you owe more money to your lender than the car is worth.

Negative equity occurs because the value of a vehicle often depreciates faster than you can pay down your loan. Carfax reports that a new vehicle value can decrease by over 20% the first year you own it. This can cause problems in the future if you need to sell or trade in your vehicle before you pay off the loan.

Being upside-down on a car loan can also be an issue if you get in a wreck and your car is totaled. The same is true if your vehicle is stolen. Although you carry full coverage, your insurance may only cover the actual cash value of your vehicle, not your full loan amount.

You could be left owing thousands of dollars to the bank on a car you can no longer drive.

How to fix an upside down car loan

If you’re already in an upside down auto loan and looking for an exit strategy, you have a few options.

Pay extra toward the principal.

Making extra, principal-only payments can be a great way to fix an upside down car loan. Sure, extra payments can be painful in the short term. But if they get you to a place where you can trade in your vehicle or refinance your existing loan, it may be worth the sacrifice.

__Sell your vehicle to a private party. __

When you sell your vehicle directly to a private party versus trading it in with a dealership, you’ll generally receive more money. Sometimes, the higher private party sales price may be enough to resolve any negative equity issues.

Visit Kelley Blue Book or a similar service to compare trade-in versus private sales values.

__Roll over the balance to a new loan. __

Adding a vehicle’s negative equity onto a new auto loan is the worst way to get out of an upside down auto loan. You’re immediately putting yourself in a bad financial position with the new loan.

If you opt to go this route anyway, the Federal Trade Commission recommends keeping the length of your new loan as short as you can. A shorter loan term will help you get back to a positive equity position faster.

How to find the best deal

When you plan to purchase a new or new-to-you vehicle, it’s crucial to do some research first. Yes, you might want to go straight to the dealership to pick out a new set of wheels, but force yourself to hit the brakes. (Pun intended.)

Proper preparation could save you thousands of dollars and help you to avoid problems. Here’s how to find the best deal on car loans:

1 - Prepare your credit

It’s wise to check your three credit reports before you apply for any major financing. You should review your reports and dispute credit reporting errors you discover. (Errors can lower credit scores.)

Before filling out any loan applications, it’s also wise to aim to build your credit as much as possible, since bad credit makes buying a car more expensive. Building and rebuilding credit takes time, but tips like paying down your credit card debt could potentially net you quicker results.

__2 - Compare financing options up front __

Often, you can finance the vehicle you want to buy directly from the dealership. But that’s not the only way to get a car loan. You can (and should) shop around first to make sure you’re getting the lowest interest rate possible. Check with local banks, credit unions, and online lenders. If possible, it’s best to get pre-approved for financing before you step foot into a dealership.

Remember, newer FICO scoring models give you a 45-day window to rate shop. During this time, multiple auto loan applications will only count as one hard inquiry where your credit score is concerned.

__3 - Look for dealer incentives __

Auto manufacturers often offer special financing or cash back on certain vehicle models. If your credit is in decent shape and you’re willing to purchase a car that has a special incentive attached to it, you could save money.

4 - Familiarize yourself with sales techniques

Don’t let a salesperson convince you to focus on the monthly payment amount instead of the overall price of the vehicle and interest rate of the loan. By learning common sales tactics used by auto dealers, you might avoid settling for a bad deal.

__5 - Don’t be afraid to negotiate __

Just like it can help to study sales techniques that auto dealers use, you can learn some negotiation tactics of your own, including asking for a lower purchase price. Most of all, don’t be afraid to walk away if you’re not sure you’re getting a good deal. You can always come back later if you don’t find a better deal at another dealership.

Alternatives to long-term car loans

If you’re considering a long-term car loan, it’s likely because you want to keep your monthly payment as affordable as possible. The desire to secure a lower monthly payment is wise and can be good for your budget.

Yet taking out a six, seven, or eight-year car loan isn’t the only way to keep your monthly payment low. Consider the following alternatives to long-term auto financing.

Buy a less expensive car

With all other factors being held equal, the less money you finance, the lower your monthly payment will be. Buying a used car might help you save money on financing (not to mention lower insurance costs, sales tax, and property tax). To avoid going upside-down, only buy a car you can afford.

The table below shows an example of how reducing your loan size by $5,000 could lower your monthly payment $124 per month. In this scenario, a smaller loan amount would also save you nearly $1,000 in overall interest.

Screen Shot 2020-01-15 at 8.53.51 AM

Secure a lower interest rate

Your interest rate can also have a big influence on the size of your monthly payment. The table below shows an example of how reducing a 21.26% APR loan to 4.81% could save you $163 per month. That’s a savings of $7,838 overall.

Screen Shot 2020-01-15 at 8.54.30 AM

Of course, the difference between a 21.26% APR auto loan and an APR of 4.81% is huge (and largely based on your credit score). Your FICO Score would need to improve from the 589 range to around 720 for a chance to see this type of result. That’s not impossible, but it would require a lot of hard work and patience.

There are online financial calculators you can choose to estimate what your car payments could be and the total cost of interest to help you plan ahead, like this one from FICO.

Think long term

If you’re already in a long-term auto loan, you’re certainly not alone. According to Experian, over 70% of new auto loans in Q1 of 2019 featured repayment terms longer than 60 months. Almost 85% of used auto loans taken out during that same period were longer than 48 months.

There’s no need to beat yourself up if you’re unhappy with your past car buying choices. Everyone makes mistakes. However, you can learn from your past choices and make better financial decisions in the future.

If you’re upside down in an auto loan, figure out the best way to fix that negative equity now. Then, the next time you need to purchase a car, make sure long-term auto loans are off the table and you only buy what you can afford. You might need to save up a higher down payment or purchase a less expensive vehicle, but the sacrifice will be worth it in the long run.

More about cars and credit

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication.

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Written on January 30, 2020
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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