Yahoo Finance Expert: Why You Should Never Take Out a Car Loan That Lasts More Than 5 Years
As car prices remain high, buyers are resorting to taking on longer-term loans to keep monthly payments down. About 70% of new-vehicle loans had terms over 60 months in the second quarter of 2024, with the average new-vehicle loan term now at 69 months, Edmunds reported.
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However, while a longer-term loan might have lower monthly payments, there are several reasons this might not be a smart option.
Financing Costs Are High
Robert Frick, corporate economist at Navy Federal Credit Union, advises against taking out a car loan with a term that’s longer than five years. One reason is the cost of financing. The average new-vehicle APR is now 7.3%, Edmunds reported. If your loan term is longer than 60 months, you end up paying a lot more in interest, especially with rates as high as they are.
Secondly, your car is more likely to need very expensive repairs during the life of your loan if it’s a longer-term loan, especially if you purchase a used vehicle.
“You get into the scary territory where your car might get to a point where you don’t want to repair it, but you still have years left on your loan,” Frick said. “When you get to that point, your choice is to roll over your old car loan into your new car loan, or walk away from your car.”
The second option can negatively impact your finances for years to come.
“A lot of people are doing that now,” Frick said, “but it’s really devastating for people’s credit.”
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Stick To a Cheap, Reliable Car That’s in Your Budget
Instead of opting for a pricey car with a loan term of over 60 months, opt for a cheaper option that you can afford the monthly payments for without having to extend the loan past five years. Opting for an inexpensive, reliable car will save you money in many ways.
“People have to think differently about buying a car, or they’re going to be trapped in what a lot of people find themselves in right now, which is [having to deal with] grossly expensive repairs [and] higher insurance,” Frick said. “When you get your next car, get a cheaper, more dependable car, and all of a sudden your costs will be dramatically less.”
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This article originally appeared on GOBankingRates.com: Expert: Why You Should Never Take Out a Car Loan That Lasts More Than 5 Years
