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Auto Loan Terms: How Long is Too Long?

Couple looking at car

After numerous test drives, you've finally found your dream car. You're ready for the dealer to hand over the keys, but there's just one problem. The monthly payments would put a major squeeze on your budget. Even with a good credit score and a competitive interest rate, securing an auto loan might interfere with your plans of paying off your student loans or other debts early. 

One way to create breathing room in your budget is to extend auto loan terms beyond the standard 60 months. A loan term of up to 84 months would allow you to secure your dream car while making low monthly payments. But smaller payments also mean you'll likely take longer to pay off the vehicle, which could lead to other unexpected financial consequences. 

Before you commit to your first auto loan payment, consider how a longer auto loan term might affect your finances. 

Resale and Trade-In Values

Do you plan to sell your vehicle or trade it in for a newer model once it's paid off? If so, be realistic about the amount you may receive for your car. As each year passes, your vehicle is decreasing in value. If you make your last car payment at the end of the seventh year, it could be worth as little as 20 percent of its original price. 

Interest Charges

Interest rates and loan terms influence how much interest you'll pay on the path to car ownership. Weigh the immediate benefits of lower monthly payments against the total financing costs. Longer financing terms mean more money is spent in interest. And longer terms will likely have higher interest rates associated with the loan as opposed to a standard 60 month term. Hefty interest charges can cause you to delay your other long-term financial goals, such as saving for a down payment on a home or paying off other high-interest rate debt. 

Equity

A longer loan term could result in negative equity. Like other loans with extended repayment terms, it will take longer to build equity since most of the first year's worth of payments get applied to interest as opposed to principal. 

Negative equity can also harm you financially if your car is totaled after an accident. Your insurance carrier may reimburse you only for the current market value, leaving you responsible for paying the loan balance. 

When might an 84-month new or 75-month used auto loan be a good financial move?

A longer-term auto loan makes sense when: 

  • You plan on refinancing the loan within the first few years of purchase.
  • You need to keep costs down while you pay off higher interest rate debt.
  • A longer-term auto loan is part of a larger financial plan. 
  • You expect to pay off the loan early with proceeds from the sale of a home or an inheritance.
  • You expect to offset interest costs with other discounts, like manufacturer rebates, dealer incentives, or Preferred Dealer Network discounts available when you finance with the Credit Union of Colorado.

An extended payment term may be what you need based on your unique financial situation. We offer financing for up to 84 months on new and up to 75 months on used vehicles*. Apply now or call 800.444.4816 to speak with a member representative.

*Conditions apply
 

Article by Tracy Scott