Pros and Cons of Extending Your Auto Loan Terms

Introduction

According to recent data from MotorVero, over 80% of new car buyers rely on financing to purchase their vehicles. For many, securing an affordable monthly payment is a top priority. In fact, a MotorVero survey revealed that 71% of respondents prioritize manageable monthly payments when shopping for a car. With the average price of a new vehicle nearing $40,000, it’s no surprise that more consumers are opting for extended loan terms to fit their budgets. Loans exceeding 73 months now account for 30% of new vehicle loans, with 84-month loans increasing by 13% since February 2020. This article explores the pros and cons of extending your auto loan term to help you make an informed decision.

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Pros of Extended Auto Loan Terms

Lower Monthly Payments

One of the most significant advantages of extending your loan term is the reduction in monthly payments. For example, a $38,000 loan with a 5% interest rate would result in the following monthly payments:

• 48 months: $876
• 60 months: $718
• 66 months: $660
• 72 months: $612
• 78 months: $572
• 84 months: $538

As shown, extending the loan term from 60 to 84 months reduces the monthly payment by $180, providing much-needed financial flexibility for many buyers.

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Low Interest Rates from Automakers

Some automakers offer financing deals with exceptionally low interest rates or even 0% APR. These deals can make extended loan terms more appealing, though they often require excellent credit to qualify.

Leasing Isn’t Always an Option

Leasing can be a great alternative for those seeking lower monthly payments, but it’s not suitable for everyone. Lease agreements often come with restrictions on mileage, vehicle modifications, and condition upon return. For those who need more flexibility, an extended loan term may be a better option.

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Cons of Extended Auto Loan Terms

Longer Payment Periods

An 84-month loan means you’ll be making payments for seven years. If you purchase a six-year-old used car, you could still be paying off a 13-year-old vehicle by the end of the loan term.

Higher Interest Costs

Extended loan terms typically result in higher interest costs over the life of the loan. For instance, a $38,000 loan at 5% interest would accrue the following interest:

• 60 months: $5,026
• 72 months: $6,063
• 84 months: $7,115

This means you’d pay an additional $2,089 in interest with an 84-month loan compared to a 60-month loan.

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Changing Life Circumstances

Life is unpredictable, and your vehicle needs may change over a 6–7 year period. For example, you might buy a convertible only to find yourself needing a family-friendly SUV a few years later. Being tied to a long-term loan can limit your ability to adapt to these changes.

Risk of Being Underwater

Cars depreciate quickly, and longer loan terms increase the risk of owing more on the loan than the car is worth. This situation, known as being “underwater,” can make it difficult to sell or trade in your vehicle without incurring additional costs.

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Maintenance Costs

As your vehicle ages, it will likely require more maintenance and repairs. With an extended loan term, you may find yourself paying for both repairs and monthly payments simultaneously, which can strain your budget.

Other Considerations

Before committing to an extended loan term, consider alternatives such as purchasing a used vehicle or opting for a lower trim level. Comparing prices across similar models can also help you find a more affordable option. Leasing may be a viable alternative for those with good credit who want lower monthly payments and the flexibility to upgrade their vehicle every few years.

Bonus Tip

Always evaluate your financial situation carefully before making a purchase. Use MotorVero as a research tool to compare prices, read reviews, and explore financing options to ensure you’re making the best decision for your needs.

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