LONGER-TERM LOAN CONSIDERATIONS
Posted on: Jul. 10, 2017 in Car Loans

Borrowing money almost always comes at a cost. Lenders charge interest on the amount you borrow – that’s how they make their money. The higher the interest rate, the more expensive your loan is going to cost you in the long run. But that’s not the only way that borrowing can get expensive. A long-term loan can raise that overall price more than you’d imagine.

But this isn’t the only reason you should shy away from extending your loan term. Before we jump in, let’s talk about how long loan terms really are. Back in the 1970s, when loans as we know them became more popular, the average term was just under three years. By the early 2000s, this had stretched out closer to five years, or 60 months. Many experts recommended, and some still do, that the best length is 48 to 60 months. However, due in part to the recent recession, loan terms have been extended in an effort to lower monthly costs and make new and used cars more affordable.

These days, more and more cars are being financed for up to 84 months. That’s 7 years!

As we mentioned before, the longer the term, the more interest you’ll pay. This is especially concerning for borrowers with less than perfect credit, because their interest rates are typically higher. That means a double-whammy of higher overall interest charges.

Let’s look at some of the other downsides to this new trend.

  1. Where will you be in seven years? What will live look like? Everything could change in that time – family size, living situation or location, transportation needs. Seven years is a very long commitment if life is in flux.
  2. In the early stages of an auto loan, borrowers are typically upside down, meaning they owe more than the car is worth. The sooner you can get out of this stage, the better off you are because you’ll have the option resell, refinance or trade it in once you owe less. The longer your loan term, the longer it will take you to get to this point.
  3. Cars break down. Buying a used car means at some point you’ll likely need to start making repairs. In fact, a time could come when the repairs outweigh the vehicle’s worth. If you’re still paying it off though, you may have no choice but to find a way to keep that car running. If the car reaches the point where it can’t be fixed, you’ll still need to pay it off even if you can’t use it anymore.
  4. Your financial situation could change. The window where you’re obligated to repay this loan stays open longer, so you need to make sure you can pay this bill longer. Life becomes a little more inflexible. But also, what if things get better? What if your credit score improves and you could definitely qualify for a lower rate, but you owe too much on your car to refinance? You can make drastic improvements on your financial situation and still be stuck.
  5. Consider prepayment penalties. Some loans will charge you extra if you pay them off earlier than originally agreed to. After all, they have to make that money they’re no longer getting through interest charges. If you have a windfall after five years and you’re able to pay off the car, it can cost you.

Sometimes you must take a longer-term loan to make things work out. But if you can avoid it, you’re probably better off.

If you’re ready for a new car but your credit is keeping you from getting approved, CreditYes can help with our bad credit auto loan program! We can match you with a dealership in your area that will be with you every step of the way. Our service is fast and free. Fill out our secure online application and get behind the wheel of your next car today!



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