Is an Extended Auto Loan Term Right for You?
Extended auto loans have become a popular option, especially as car prices have risen.
But are they the best choice for your budget? Let’s explore the pros and cons of extended auto loan terms, so you can find the best loan term length for your car purchase.
What Is an Extended Auto Loan?
Most auto loans typically range from 24 to 84 months, depending on the lender. The most common terms are 60 and 72 months, and so, an extended term is generally anything beyond that.
The Pros of Extended Auto Loans
Lower Monthly Payments
One of the biggest attractions of long-term auto loans is their ability to make monthly payments more affordable. For those on tight budgets or with limited cash flow, extended auto loans offer flexibility.
Flexible Budgeting
Extended loan terms free up cash flow for other expenses, making them attractive if you’re balancing several financial goals. This can be particularly helpful for people who are juggling student loans, saving for a home, or building an emergency fund.
Access to Higher-Priced Vehicles
With extended loan terms, you may be able to purchase a more expensive vehicle by giving yourself a longer period of time to pay back its cost. This may appeal to car buyers who have a consistent cash flow, but not a lot of savings for a down payment relative to the price of the car. Before choosing a higher-priced vehicle, ask yourself if you have the budget in the long run to cover the cost.
The Cons of Extended Auto Loans
Higher APR/Interest Costs
A major drawback of long-term auto loans is that you’ll pay more in interest over the life of the loan. Interest accumulation varies based on the loan; however, if a loan is outstanding for a longer period of time, you in turn pay more interest. Longer-term loans also typically have a higher interest rate, as they are considered a greater risk. So, while your monthly payments are lower, the extended term increases the overall cost. For instance, a 60-month loan might cost you far less in total interest than an 84-month loan, even with similar rates.
Depreciation Concerns
Cars depreciate rapidly, especially in their first few years. With an extended auto loan, you might find yourself in a position where you owe more on the car than it’s worth – known as negative equity, or being “upside down” on the loan. This could become a problem if you need to sell or trade in the vehicle before the loan is paid off. If you are someone who purchases new vehicles frequently, a longer-term loan may not be the right choice for you.
Risk of Financial Strain
Life is unpredictable, and a long-term commitment such as an 84-month loan can add financial strain if unexpected expenses arise. Extended loans tie you to monthly payments for several years, so if your income changes, you might find it challenging to keep up with payments.
Is a Long-Term Auto Loan Right for You?
The ideal term length depends on your budget, goals, and how long you plan to keep the vehicle. If your primary goal is lower monthly payments, rather than total saved over time, a longer term could be beneficial as long as you are comfortable with the extended commitment.
If you’re considering an auto loan, Service Credit Union’s team of financial professionals is here to help you weigh the pros and cons to find the best solution for your budget and lifestyle. Whether you’re looking for a short-term loan or need the flexibility of a longer term, we can guide you in making a decision that supports your long-term financial wellness.
