Long loan terms may seem like a good deal, but they come with higher interest rates and can put you in a situation where you owe more money than your car is worth, among other financial difficulties. How long can you finance a car?
Although a car loan’s typical repayment period is 72 months, repayment terms can be as short as 12 months or as long as 96 months. However, not all lenders will give you the option of a minimum or maximum term.
Please read on for more detailed information.
What’s the Longest You Can Finance a Car?
Although a car loan’s typical repayment period is 72 months, there are also options with shorter and longer terms, ranging from 12 months to 96 months, though not all lenders will offer the shortest- or longest-term options.
Shorter repayment terms usually result in higher monthly payments with lower interest rates and overall interest savings for the lender. Longer repayment terms typically result in lower monthly payments with higher interest rates, which will ultimately cost you more overall.
Your cash flow will primarily determine the repayment period you ultimately select. A shorter repayment term with a higher payment may be chosen if you make more money and have few debts. If you have a lower income and several debts, you may prefer a longer-term loan. You’ll have a lower payment with the longer term but will pay more in interest over the life of the loan.
Can I Sell a Financed Car?
As was previously mentioned, the typical loan term is currently 72 months. However, a lot can change over the course of six years, including your driving needs. What if you come across a brand-new car model that you simply must have? Another possibility is that you’re simply sick of your current vehicle because it’s getting old. Not to worry, you are not required to keep your current vehicle until the loan is repaid.
If you want to get rid of a financed car, you can sell it at any time to a private buyer or dealer, pay off any remaining loan balance, and then use the money that’s left over for whatever you want, possibly your next car. Or, to streamline the new car process, you could trade your current car to your dealer for a new car. Your new car will be purchased for the value that you and the dealer agree upon, less any remaining sum that may be owed to an existing lender.
In some cases you may be in negative equity status, a very common situation, which means you owe more on your current car than it’s worth. This isn’t always a deal breaker. The current car can be paid off and the sale can go forward if you have the necessary cash on hand. If you’re trading with a dealer, the dealer’s finance division might be able to arrange a deal that settles your debt to your current lender and adds negative equity to your new financing.
Auto Finance Mini Glossary
The following are some helpful definitions to know as you shop for a car, weigh your financing options and determine your loan repayment term:
- Amortization: To pay for something in installments over a period of time.
- Annual Percentage Rate (APR): The annual rate that you pay for borrowing money expressed as a percentage.
- Equity: A car’s market valueabove any amount owed on the loan.
- Down payment: the sum of money paid in advance to lower the loan’s balance.
- Lien: The lender typically maintains a property claim on the vehicle until you pay the debt.
- Trade-in allowance: a trade-in car’s purchase price that the dealer has agreed to pay.
How Many Years Can You Finance a Used Car?
The length of an auto loan for a used car is determined by the lender and varies from business to business. Used car loans were typically only available for 72 months until recently. But because there is a greater demand for cars today, borrowers can obtain used car loans for 84 months or longer.
Though rules differ for long-term used car loans, usually, you won’t be able to finance a car around 10 years old for an extended period, such as five years.
Reasons to Refuse Long Loans
You are “underwater” immediately. You are underwater or upside down if your debt to the lender exceeds the value of the vehicle.
“Ideally, consumers should go for the shortest length auto loan that they can afford,” says CarHub.com’s CEO, Jesse Toprak. “Your car will accrue equity more quickly the shorter the loan term.”
Your car could be traded in or sold at any time if you have equity in it, which would allow you to cash in on the value.
It positions you for a cycle of low equity. Imagine that you have to trade in the vehicle before the 72-month loan is fully repaid. You might still be in debt even after we give you credit for the trade-in’s worth.
If a situation like that shook out to you owing $4,000, “a dealer will find a way to bury that four grand in the next loan,” Weintraub says. “After that, the funds might even be rolled over into the next loan.” Your debt grows and the loan gets bigger every time.
Interest rates jump over 60 months. According to Edmunds analyst Jeremy Acevedo, consumers pay higher interest rates when they extend loan terms beyond 60 months.
Not only that, but Edmunds data show that when consumers agree to a longer loan, they apparently decide to borrow more money. That suggests they are either purchasing a more expensive car, adding extras like warranties or other products, or simply paying more for the same car.
The average loan amount was $29,591, the interest rate was 4.1%, and the term lengths ranged from 61 to 66 months. This resulted in a $512 monthly payment. However, the average amount financed was $33,238 and the interest rate increased to 6.6% when a car buyer agreed to extend the loan to 67 to 72 months. This gave the buyer a monthly payment of $556.
You’ll have to pay for both loan payments and repairs. A 6- or 7-year-old car will likely have over 75,000 miles on it. Tires, brakes, and other pricey maintenance are unavoidably required for a vehicle this old, and it may also need some unanticipated repairs.
Can you afford the $577 average loan payment listed by Experian and maintain the car? The monthly payment would increase even further if you purchased an extended warranty.
Take a look at the additional interest you’ll be paying.
Money spent on interest is money wasted. Even less is tax deductible from it. So consider the costs of extending the loan in great detail. Plugging Edmunds’ averages into an auto loan calculator, a person financing a $27,615 car at 2.8% for 60 months will pay a total of $2,010 in interest. The person who moves up to a $30,001 car and finances for 72 months at a rate of 6.4% pays triple the interest — a whopping $6,207.
What should a car buyer do then? You can obtain the vehicle of your choice while responsibly financing it.
Summary: How Long Can You Finance a Car?
While you can finance a car for up to 96 months, how long you finance a car really depends on your unique needs, wants and cash flow. Some customers choose to take out a loan with a shorter term, which results in higher monthly payments but lower overall loan costs. Some choose to borrow for a longer period of time and make lower monthly payments to help with cash flow, ultimately paying more.
