Why You Should Avoid Long-Term Auto Loans

Why Long-Term Car Loans Aren't a Good Idea

If you're considering a long-term car loan, it's important to be aware of their downsides.

You'll Pay More in Interest

A long-term car loan means smaller monthly payments, but over seven or eight years, you'll pay more interest than you would with a shorter loan term—sometimes significantly more.

The table below shows how your auto loan term affects the monthly payments and total cost of a $45,000 car purchased with a $9,000 down payment.

Choosing a 96-month loan may make your monthly car payments more affordable, but ultimately, you'll pay $6,398 more in interest for the same vehicle than you would with a three-year loan. In addition, long-term car loans typically have higher interest rates than shorter-term loans, increasing your total interest costs even more.

You can use Experian's free car payment calculator to see how different loan terms, down payments and other factors affect your monthly car payment.

Car payment calculator

Learn more: Ways to Pay Less Interest on a Car Loan

You Could Owe More Than Your Car Is Worth

New cars depreciate quickly, typically losing more than 50% of their value after five years. With a seven- or eight-year auto loan, your outstanding balance could be more than the car is worth. Owing more than your vehicle's value is known as being upside down on your loan or having negative equity.

Negative equity puts you at financial risk. If you try to sell the car, or if it's totaled in an accident, the money from the buyer or insurance company won't be enough to pay off your loan balance. You'll have to keep making payments on the loan after the car is gone—on top of any payments for the car you buy to replace it.

Learn more: Positive vs. Negative Equity in a Car: What's the Difference?

Repair Costs Can Increase Your Expenses

Manufacturers' warranties generally expire after three to five years. When you have a three- to five-year auto loan, any major problems that arise with your car are likely to be covered under the warranty. But as your car gets older, it's more likely to need costly repairs. If your loan term lasts longer than the vehicle's warranty, you could end up paying thousands of dollars to keep your car running at the same time you're paying off the loan.

You Might Have Trouble Making Loan Payments

Your financial situation may change quite a bit over seven or eight years. Ideally, those will be positive changes—but what if you lose your job, want to start saving for a home or face a major medical bill? Being locked into a long car loan can make it difficult to save for other financial goals. If your finances take a downturn, you might not be able to make your car payments, which could hurt your credit score or cause your car to be repossessed.

Alternatives to a Long-Term Auto Loan

There are several alternatives to a long-term car loan that make more financial sense.

• Save up for a bigger down payment. The more money you put down when you buy a car, the less you need to borrow. A smaller loan means smaller monthly payments, which can make your car more affordable without having to resort to a long-term auto loan.
• Choose a different car. Adjusting your standards a bit can make a big difference in your costs. Opting for the base trim or a less expensive model in the same line may reduce the vehicle's price to a manageable level.
• Lease instead of buying. Leasing lets you drive a brand-new car with a smaller down payment and monthly payment compared with buying the same vehicle. However, leasing involves many restrictions, fees and potential penalties—and at the end of the lease, you won't have anything to show for the money you spent. Depending on your needs, leasing may or may not be a good idea.
• Consider a used car. You can find gently used, certified pre-owned vehicles at many dealers, often with warranties and other benefits thrown in. Just keep in mind that interest rates on used car loans are typically higher than those on new car loans.

Learn more: How Much Car Can I Afford?

How Your Credit Score Affects Your Auto Loan

Poor credit may make it harder to get an auto loan or may limit your options to high-interest loans. Before you start shopping for auto loans, check your credit report and FICO^® Score^Θ to find out where you stand.

A FICO^® Score of 670 or above is considered good credit and can open the door to a car loan with a lower interest rate and lower monthly payment than you'd get if your credit is only fair. If you can achieve a very good or exceptional score, it could pay off. After all, those 0% interest auto loan offers are typically reserved for those with the best credit scores.

Taking the following steps can help improve your credit score:

• Pay all your bills on time. Your payment history is the biggest factor in your credit score.
• Pay down high-interest debt. Reducing credit card balances can lower your credit utilization ratio, which can benefit your credit scores.
• Avoid taking on new debt. If possible, don't apply for credit cards, loans or credit lines as you're preparing to apply for an auto loan.

Tip: Consider signing up for Experian Boost^®ø, a free feature of an Experian account. Experian Boost adds your eligible utility, phone, streaming service, rent and insurance payments to your Experian credit report, which could quickly improve your credit scores powered by Experian data.

Learn more: How to Get the Best Auto Loan Rate

Frequently Asked Questions

The Bottom Line

Long-term auto loans of 72 months or more may seem like the perfect way to get your dream car for less. But ultimately, those lower monthly payments come at a steep cost. At best, a long-term auto loan means paying thousands of dollars more in interest over the loan term. At worst, it could leave you in the precarious position of owing more than your car is worth.

Making a bigger down payment, choosing a less expensive car or improving your credit score are smarter ways to get the car you need without getting in over your head financially. As you work on improving your credit, free credit monitoring from Experian can help you keep tabs on your FICO^® Score and get alerts of important changes to your credit that could hurt your score.