Why Car Buyers Should Beware of Long-Term Auto Loans

I have written on the subject of extending car loans before, but new information has me compelled to warn people again of the dangers of stretching out a car loan to achieve an affordable payment. Believe me, I get itit is easy to get caught up in the phenomenon of the new car smell. You saw a car that looked great to you, your old car is tired, and you want the latest and greatest new model out there.

Beware of Long-Term Car Financing

You go to a dealership, take that test drive, and the love affair begins. You are blinded by they styling, the great stereo, all the safety features, new technology, and the fuel economy. Youll do whatever it takes to drive home in your dream car. Does that mean youll sign a 7-year legal, binding contract so you can afford the payments?

If so, you are not alone-but remember that misery loves company. A recent report tells us that in the first quarter of 2015, almost 30 percent of people (29.5 to be exact) who financed a new car financed it for 73 to 84 months. I would have never thought that would happen, and signals a sharp increase from just a year ago.

60-Month Loan Cutoff

Going more than 60 months should be approached with extreme caution. Based on your annual mileage, will the car even last 7 years? Are you willing to drive this car for at least 66 months before trading it, because odds are, youll have to? Did you take the time to calculate how much extra interest youll pay? You can bet that the longer the loan, the higher the interest rate. What if something catastrophic happens, like loss of job, or health issues and you need to get out of the loan? It is very difficult to get out of a long-term loan unless you had a hefty down payment at the time you purchased. We are enjoying low gas prices right now, but what happens if prices exceed $4 per gallon?

Consider Your Budget

This is where restraint comes in. If you cant get the car you want on 60 months, you should consider not buying the car. I understand that at the point you find out you cant afford it, you are already in love with it, so planning in advance is critical. There are a ton of online, so figure your budget and find out how much money you can finance on 60 months to get to the payment you can afford, and stick to it.

If you just have to have the car you love, and you dont drive over 15,000 miles a year, look at a 36 or 39-month lease, they are much easier to get out of if you have to. Also, if possible, postpone the decision until you can save enough down payment to afford the car on a 5-year contract. Perhaps you can do without some of the options on the car you like, and lastly, maybe there is a two-year old, low mileage pre-owned car out there that you would be happy with.

I had hoped the auto industry learned this lesson from years past. From their standpoint, the sooner a customer can trade, the more cars they will sell. This has been one of the successes of Toyota. They get customers back into the showroom sooner with leases, and most can get a comparable car for the same or perhaps lower payment. Unfortunately, the industry, and some dealers, are shortsighted and just want that today sale.

Bottom Line

If you buy a car today on an 84-month term, it will be almost the year 2022 until you have it paid off. Does that really sound like a good idea? Make a smart car buying decision by using restraint and by using good common sense.

Photo Credit: /Shutterstock
Keri L.
The only reason I could see going to a 72 month note is when there is a deal for 0% interest attached. The difficulty with that, as you well know, is that the dealer will not discount that unit when he is not making money on the interest. It's give and take...what do I give up to take that deal? Be wise!
Car P.
Keri, good to hear from you. I have to disagree. Factory incentives costs the dealers nothing and therefore do not affect their bottom line profit. Dealers want to give you all the incentives possible, it makes selling cars a lot easier.

You have to look at the whole deal, what makes your total out of pocket the least. Sometimes that is 0%, sometimes that is big rebates. One thing I love about my dealers is they?ll help walk you through your options.

If I can ever help you, please let me know.

Jerry Reynolds, President
Despreporno Radio Network
Steve .
I've learned that if buying new, we should buy the least expensive car that meets our needs (not wants), versus trying to buy how much car we can afford. It's saved me from a lot of buyer's remorse.


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