Stretching an auto loan over 72 months can be helpful if you need to lower your monthly payment, but if you have to take out a six-year loan just to afford a car, do it with caution. These days, longer loan terms are becoming more common to help combat rising vehicle prices. However, it might not be a wise choice if you’re already struggling with credit or financial issues because the longer your loan term is, the more you end up paying overall.
Bad Credit Borrowers and Auto Loans
When you’re dealing with bad credit, getting a car loan can be difficult. To make the process as smooth as possible, you have to make sure that you’re working with the right type of lender, and that you meet all the lending qualifications they have.
These conditions, such as minimum income, residence stability, and a down payment, help a lender determine your loan worthiness. By looking at these factors in addition to your credit score, they’re getting the full picture in order to consider you for an auto loan approval.
Another factor that lenders take into consideration is your budget. To do this, they calculate your debt to income (DTI) and payment to income (PTI) ratios. Your DTI ratio shows lenders how much money you have available for a car payment compared to your income, while your PTI ratio lets them see how much of your budget could be set aside for the loan payment itself. These calculations are easy to do yourself, and you can learn more about DTI and PTI ratios here.
If you’re able to qualify for a bad credit auto loan, you have to make sure that you balance your monthly payment with your loan term. Bad credit borrowers usually qualify for loans at higher interest rates than borrowers with better credit. The higher the interest rate, the more you end up paying in the long run. This is just one thing to consider before you dive into a 72-month loan.
The Drawbacks of Long-Term Loans
As a borrower who’s thinking about a 72-month loan, there are many things to think about before you sign a contract. One of the biggest deciding factors for many is cost, and the longer your loan term is, the more the loan costs overall.
For example, if you finance $12,000 with a 10% interest rate for 72 months, your loan costs you a total of $16,006 – this means you’re paying just over $4,000 in interest over six years.
However, if you were to take a year off the loan term, making it 60 months, you can save $708 overall in interest charges. Take out a 48-month loan instead, and you save $1,397 over the 72-month loan. You can see how different loan terms affect your overall cost with our Monthly Payment Calculator.
The extra money paid in interest charges is just the tip of the iceberg with long-term loans. Here are a few other things to keep in mind when you’re considering a 72-month loan:
- Your vehicle is going to depreciate. Depreciation can’t be stopped. It begins as soon as you drive your car off the lot, and continues for the life of the vehicle. With a long-term loan, you’re likely to owe more than your car is worth for a longer period of time. This could lead you to being upside down on your auto loan when the time comes to trade it in or sell it, which likely means you could start your next loan with even more negative equity. This can be a vicious cycle known as the trade-in treadmill, and it can be hard to stop. The best solution is to stay off this track with a shorter loan that allows you to pay it off while there’s still equity in your vehicle.
- Interest rates can be even higher with a longer loan term. Looking to pay off a loan in six or seven years can lead to even higher interest rates. This is the cost of asking to borrow money for a longer period of time. Even if a lender doesn’t offer you a lower interest rate on a shorter-term loan, you’re still saving money when you opt for a shorter loan length.
- What condition is your car going to be in six years from now? As vehicles age, they often need more and more maintenance. Do you really want to be sinking hundreds of dollars into repairs on a car you don’t even own yet? If a mechanical issue or accident leaves you without a vehicle, you still have to make your loan payments. If you already thought about this and added an extended warranty at the beginning, you have the peace of mind of coverage, but your cost of financing ultimately increases.
Combating Negative Equity on a Long-Term Loan
If there’s no getting around taking out a long-term loan, making the largest down payment possible should help you to combat the effects of negative equity. Negative equity happens when you owe more for your car than it’s worth, and when you stretch out your loan term, you risk staying this way for longer.
To combat the effects of taking out a loan that’s 72 months or longer, you can make bigger payments whenever possible to help cut down on the time you’re paying for your loan and get out of negative equity faster.
Looking for Financing? We Can Help
It’s important that you get the shortest loan term you can comfortably afford when you’re financing a vehicle. If you’re thinking about getting a long-term auto loan, be cautious, and consider all the factors that could come into play over the next 72 months or more. When you have to take out a long-term loan to make the payments affordable, you might want to rethink your car choice.
If you’re ready to find auto financing, we want to help. The Car Connection has a nationwide network of special finance dealerships that have the lending resources available to help people get the car loans they’re looking for.
Don’t hesitate to get the vehicle you need, just fill out our no-obligation auto loan request form to get started right now!