Extended terms mean you pay more
"Loan terms going over 72 months is really a rarity in today's below-prime sector market," Landy says. "Some luxury-model prices are north of $60,000 or $70,000, so more and more banks will offer extended terms beyond 72 months."
Consumers who opt for a longer loan amount will undoubtedly pay more in interest over the life of the loan. According to Bankrate.com's auto loan calculator, a $25,000 auto loan at an interest rate of 4 percent will cost you $564.48 per month for 48 months, or $27,095.04 over the life of the loan. The same amount and interest rate over 84 months will cost you $341.72 per month but $28,704.48 over the life of the loan. So, while you pay less each month, the total cost of the car is greater.
48-month loan versus 84-month loan
$25,000 auto loan at 4 percent interest
|$564.48 × 48 months||$27,095.04|
|$341.72 × 84 months||$28,704.48|
Upside-down loans are common with extended terms
That's not the only risk associated with this type of financing. "When you lengthen the term of your loan, you are pushing out your negative to positive equity," says Eric Lyman, vice president of editorial and consulting for ALG, the Santa Barbara, California, automobile industry research company.
That means it will take you that much longer to break even on your car purchase. Any consumer who buys a new car will see the value of that vehicle depreciate as soon as they drive off the dealer lot.
According to Lyman, it typically takes 42 months, or 3 1/2 years, to break even on your loan when trading your car in. That means you can take out a new car loan and forget about the old one. But if you have a loan for a longer period, you may have to pay the dealer in order to trade in for a new car or carry the existing debt over to the new car loan.
"Let's say you have a car that's worth $12,000 but you owe $14,000 on the loan," Lyman says. "Your options are to borrow another $2,000 and go further into debt, or drive away and not buy that new car."
Used car values also impacted
Extended-term loans also can have a negative impact on the overall car market, particularly for used cars, Lyman says. That's because dealers and car manufacturers don't want to lose a sale and will go to great lengths to help car buyers who have a loan that's worth more than the vehicle.
Consumers who opt for a longer loan term will undoubtedly pay more in interest over the life of the loan.
Know your buying pattern
Despite all the negative aspects of extended-term car loans, there is a fair share of consumers signing on the dotted line. But whether it makes sense for you boils down to the type of car owner you are.
According to industry experts, while consumers on average will want to trade their car in after four years, there are those holdouts who keep their vehicle until it fully depreciates. What side you fall on will help determine the best loan for your situation.
Experian's Zabritski says if you are the type of automobile owner who wants a new car every couple of years, a longer-term loan might not be the best loan for you because of the greater likelihood that you'll be in a negative equity situation when you go to trade it in.
But if you are the type of person who holds on to their vehicle for years and can only afford a certain type of monthly payment, then a longer-term loan could be the way to go.
"You have to know your own buying pattern to figure out whether or not it makes sense," Zabritski says.