72 month auto loans are becoming increasingly popular options for new and used car buyers. There are several advantages, as well as disadvantages to 72 month car loans. They are 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. There are good and bad sides to these loans, and you should read some more information here, to see if this kind of loan is for you.
Is a 72 Month Car Loan a Good Idea?
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.
Car Loan Rates for Your Long Term Car Loan
Many of today's drivers are looking for any solution for lowering their monthly auto loan payments. A longer term loan, for example, changing a 36-month loan into a 72-month auto loan is one way to get the payments to go down. However, this kind of long term loan always raises the total amount that a driver will pay over time. That's because of how lenders use the APR or annual percentage rate to compound or "build" interest.
Looking at the APR and Other Factors
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 "principle," 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.
Loan to Value Scenarios: Owing More Than a 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 "under water" on a car loan, in other words, owing more than a vehicle is worth. This is called a bad "loan to value" ratio. 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.
A lot of long-term car loans are financed by dealerships who want to get car shoppers into late models or more expensive vehicles. They may be able to entice buyers by offering long-term car loans, but what they generally don't stress is that the interest on these types of loans tends to spiral out of control without careful observation.
Looking at the Total Interest
What you need to do is calculate all of the interest you will end up paying on a vehicle according to the APR, loan term, and overall agreement. The good news is that because unsecured loans (loans not backed by collateral such as a home or other vehicle) generally come with fixed rates, it is possible to easily determine what a driver will pay over the entire term of the loan.
With a 72 month auto loan, you often end up paying nearly double the interest on a loan when lengthening it by two or three years. That's why financial experts suggest getting shorter-term auto loans, and buying only what you can afford with moderately-sized monthly payments, rather than stretching those payments out over a longer period.
Online loan calculators, such as this one from BankRate, allow you enter the amount of the loan, the monthly payments and other loan terms to come up with the total cost for the entire auto loan.
Help from Lenders
In a down market, lenders get nervous and tighten up a lot of the restrictions for offering auto loans to the public. This means that borrowers can get little help from lenders, who require more upfront payment and more proof of affordability rather than less. The exception to this rule comes from aggressive lending by dealers, who may be quick to extend long-term auto loans with high interest rates, but who also may be quick to repossess vehicles and "turn them over" for even more profit, leaving the hapless car buyer with the bill.
The moral of the story is that you should take care to see what you can afford, and avoid stretching out loans to compensate for a cash crunch.
Negative Car Equity
Negative equity occurs when the value of a vehicle is less than what is owed on the vehicle. Negative equity is especially common for long-term loans, like a 72-month car loan. Anyone thinking about taking on one of these long-term loans must consider some basic issues to avoid extensive financial liability.
Rolling it Over
Drivers who erroneously think the lender or the dealer will take care of negative equity at trade-in should think again. In reality, dealers generally roll any negative balance into the financing of your next vehicle. In other words, if you owe more than the car is worth when you trade it in, you will probably see that balance attached to the terms of your new loan.
APR and Annual Percentage Rate: Looking at Loan Terms
One problem that leads to negative equity is what some might call passive borrowing. Borrowers sometimes accept an offer for financing from a dealer without thinking the situation through.
Some deals include one year at 0 percent, which is great. But 0 percent financing is not a good deal unless the APR for successive years is at least moderately low. Otherwise, you are just putting off payment until the future, when snowballing interest often causes huge negative equity situations.
Avoiding Negative Equity
One way you can improve a negative equity situation is to value upfront payment over delayed payment. Opt for a dealer rebate instead of a low introductory interest rate. Choosing the low introductory interest rate leaves the loan value high, and again, just delays payment. Taking the rebate, on the other hand, will automatically reduce a driver's debt, and that will help a lot down the road to avoid negative equity.
Other options include looking into early payment possibilities. Some auto loans come with prepayment penalties, while other loans allow for prepayment, and less buildup of interest.
One of the main ways to avoid negative equity is simply to shorten the term of a loan, so that the interest does not have as much time to build up. That's the reason why many experts counsel against 72-month car loans when advising buyers.
Dissecting 72 month car loans will help determine if this type of loan is right for you. And if not, it will give you a more clear idea just how long of a term you wish to take out when needing purchase assistance with a vehicle. Long-term vs. short-term, "upside down" payments, depreciation, advantages vs. disadvantages--all of these issues need exploring. Know what you can afford, and look at all your options.