Does a 72-Month Car Loan Make Sense?

June 10, 2016
Car loans with 72-month terms are now quite common. They're popular because they offer a way to lower your monthly car payments. You spread out the payments over a long period of time, which lowers the payments compared to a shorter loan. Another advantage is that for loans that long, chances are down the road you can refinance for a better APR interest rate.
One of the biggest downsides to a 72-month auto loan is that since you are paying over more months, you are not paying off the principal quickly. Consequently, you pay a ton in interest compared to shorter loans. The interest means that you will be paying even more for the car. One last problem is that since cars depreciate very quickly, when you are in the final years of the loan, you will be paying off a car that is likely worth less than you owe. You may owe money when you go to trade in your car.

Virtually any expert will tell you that a 72-month car loan is hardly ever a good idea. The reason has to do with the natural way that auto loans work over time, with interest that is compounded using a specific interest rate. Keeping the interest rate low is one way to make sure you can pay off a car loan, but keeping the loan term short is critical for making sure you don't end up paying much more than what the vehicle was worth.

To fully understand what you will be paying, look at what the APR is, how it is compounded, and how much of each payment goes toward the principal, or the original loan amount. The rest of the payment goes toward paying off the interest. If you sign off on splitting a short term loan, like a 24-month loan into a 72-month loan, there's a high chance of paying much more than the vehicle is worth.

The long-term car loan is also bad if you would have otherwise been able to resell the vehicle at a future time and recoup value. Instead, the value of the vehicle will decline, while the amount owed will not decrease as quickly. This leads to the potential for you to be underwater on a car loan, in other words, owing more than a vehicle is worth. Eventually the vehicle can wear out, or experience engine or transmission issues not worth fixing, you can be left with only the payments on the car.

Instead, work the other way, and make every effort to pay as much of an auto loan up front as possible. A large down payment is one sure-fire solution for controlling the eventual costs of an auto loan. Another is to arrange for larger payments, to pay off the loan in less time. Yet another is to make sure that at loan time, the vehicle becomes the property of the borrower, with the option to re-sell it to cover the investment. In any case, it's actually a good idea to avoid the 72-month auto loan, unless there is a specific plan to be able to repay a lender.

Need a Car Loan?

It only takes a minute.

Loan approval is not guranteed and is subject to credit application and approval of the lender. Individual loan terms may vary.