Long Term Loaning for a Car

At first glance, a long term car loan might appear an attractive option because of a lower monthly payment than a comparable short term loan. The Lendingtree website defines a long term loan as 72 or 84 months. While some may argue that choosing a longer loan term negatively affects equity and interest payments, this isn't always true.

Interest Rates

Your approved interest rate depends on your credit, the amount you borrow and the age of the vehicle you purchase. Lenders typically offer the same interest rate for terms up to 60 months, although some may offer lower rates for shorter terms. Loan terms exceeding 60 months usually have higher interest rates. To determine the impact that a higher interest rate and longer term have on your total loan payback amount, use an auto loan calculator (see Resource link). Unless you pay off the loan early, you might pay back thousands in extra interest charges, relative to a short term loan. Ask your lender if it charges pre-payment penalty fees before you decide to pursue a longer loan term option.

Equity

Pursuing a longer loan term might result in decreased vehicle equity. If you pursue a loan term for 72 months or longer without a down payment or a plan to pay off the loan early, you'll likely run into problems if you try to sell your car or trade it at a later date. Expect to provide money out-of-pocket to satisfy your loan balance if you sell the car privately, or to cover negative equity if you trade it in toward a new purchase. Provide a down payment of at least 20 percent to avoid a negative equity situation. This way, you can still take advantage of a low monthly payment.

Dealer Incentives

Dealers often provide low rate financing as an incentive to purchase a particular new vehicle. You might find you can purchase a new car for zero percent. If you can take advantage of a low rate, such as zero or 1.9 percent for 72 months, you might create equity in your vehicle just as fast as with a shorter term loan, without having to provide a large down payment. Use an auto loan calculator to determine the differences in monthly payments and payback amounts. You'll save money by choosing the longer term because of the low rate.

Loan Considerations

Your credit rating and the vehicle you choose to finance effects your loan term approval. With poor credit, a lender might require you to borrow for a shorter term, such as 48 months or less, to obtain an approval. Or, if your approved interest rate is too high, you might have to choose a longer term to afford the monthly payment. Lenders might also require a shorter loan term for older or high mileage vehicles. Low interest rates offered as a dealer incentive or those advertised on lender websites require good to excellent credit. Your actual interest rate may vary and approval terms ultimately depend on your credit score.