Taking out a 72-month auto loan can make sense in some situations, but most financial experts don’t consider it a good idea, generally speaking. Next up are three major drawbacks of a 72-month loan.
1. You May End Up Underwater On Your Loan
Cars depreciate in value over time. Depending on your initial loan amount, interest rate and how quickly and much your car depreciates, the amount you still owe on a 72-month auto loan might come to exceed the car’s resale value. This is what’s known as being “underwater” or “upside down” on the loan, or having negative equity.
New cars depreciate especially quickly, losing a lot of their value within the first couple of years. Some experts say a car loses 10% of its value the moment you drive it off the lot. Depreciation rates differ by car, so your vehicle could lose its value even faster.
If you do decide to take out a 72-month loan, it may be a good idea to purchase gap insurance, which covers the difference between the car’s depreciated value – the amount your car insurance provider would pay – and what you owe on the vehicle if it’s totaled, damaged or stolen.
2. 72-Month Car Loan Rates Are Typically High
Lenders typically believe that borrowers who take out a loan with a longer repayment term are more likely to default on the loan. To offset the added risk that lenders tend to perceive, they may charge a higher interest rate or annual percentage rate (APR) than they otherwise would. A high interest rate means you’ll end up paying more for the total cost of the car when all is said and done and you’ve made all your loan payments. Paying more money in interest has no benefit, and some people consider it to be wasted money.
3. You May Have To Pay For Car Repairs While Still Paying Your Loan
If you take out a long-term auto loan, your repayment term could be lengthier than the car’s warranty, leading to financial problems if you have to cover repair costs out-of-pocket while still making car payments.
For instance, let’s say the warranty lasts 60 months but your car loan has a 72-month term. When the warranty ends, you may have to pay for a major car repair on top of your monthly car payments. Fortunately, many auto repair financing options are available if you find yourself in this situation and need a little extra help, but the downside of this strategy is that you may have to pay repair financing costs in addition to your car payment.
FAQs
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go. You can learn more about car loans here.
Is it smart to do a 72-month car loan? ›
A 72-month auto loan isn't always the best option. Compared to a 60-month loan, you'll pay interest for another 12 months, which increases the overall cost of borrowing. A 72-month auto loan also puts you more at risk of being upside-down on the loan, which is owing more than your vehicle is worth.
What is the rule of 72 on a car loan? ›
These car loans allow you to spread out the payment for a car over 72 months, resulting in a lower car payment each month than if you chose a shorter loan. Because 72-month car loans are common, you could have a high chance of finding a good interest rate since you'll have options for comparing different quotes.
Is 5.9 APR good for a car 72 months? ›
A 72-month loan for a car is a long-term loan, and long-term loans typically come with higher interest. While long-term loans translate to lower monthly payments, they result in more interest paid over the life of the loan. With that said, an interest rate of around 5% for a 72-month auto loan is considered ideal.
How many months should you finance a car? ›
NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months. These maximums can help you avoid some of the negative outcomes of long-term loans.
Why is a major downside of a 72-month loan? ›
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan.
Is it worth financing a car for 5 years? ›
Key takeaways. A longer loan term means you'll get a lower monthly payment, but you'll also pay more in interest. A shorter loan term is better, as it helps minimize borrowing costs and the risk of being upside-down on your loan.
Why is it a good idea to know about the Rule of 72? ›
The rule of 72 can help you forecast how long it will take for your investments to double. Divide 72 by the annual fixed interest rate to determine the rate at which the money would double. Historical returns on your investment type can help choose a realistic expected return rate, in some cases.
What is the 20 3 8 rule for car loans? ›
The 20/3/8 car buying rule says you should put 20% down, pay off your car loan in three years (36 months), and spend no more than 8% of your pretax income on car payments. As we go into depth to determine how realistic this rule is, you may consider whether it can actually help you budget for your next car.
What is the 24 10 rule for cars? ›
Basically, the rule goes that you provide a down payment of 20% of the balance, sign a loan for a four-year period, and pay no more than 10% of your monthly income on car expenses. These expenses include any money you put towards your new vehicle, including gas, insurance, and loan payments.
For example, a car buyer considering a $40,000 new car loan with an 84-month term at 9% APR would have a monthly car payment of about $623 and pay $12,369 in interest over the seven-year loan.
How much is a $30,000 car payment for 5 years? ›
Provided the down payment is $5,000, the interest rate is 10%, and the loan length is five years, the monthly payment will be $531.18/month. With a $1,000 down payment and an interest rate of 20% with a five year loan, your monthly payment will be $768.32/month.
How much is a $40000 car payment for 72 months? ›
If you take a car loan of $40000 at an interest rate of 4.12% for a loan term of 72 months, then using an auto loan calculator, you can find that your monthly payment should be $628. When the loan term changes to 60 months, the monthly payment on a $40000 car loan will be $738.83.
How do I pay off a 6 year car loan in 3 years? ›
Once you've decided you are going to pay down or pay off your loan early, there are five ways to reach your goal:
- Make a full lump sum payment. ...
- Make a partial lump sum payment. ...
- Make extra payments each month. ...
- Make larger payments each month. ...
- Request extra or larger payments to go toward your principal.
According to our research, you shouldn't spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%. You can use a car loan calculator to calculate a monthly payment within your budget.
What are the disadvantages of a large down payment on a car? ›
What are the disadvantages of a large down payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings.
Is it smart to finance a car for 7 years? ›
An 84-month auto loan can mean lower monthly payments than you'd get with a shorter-term loan. But having as long as seven years to pay off your car isn't necessarily a good idea.
How to pay off a 7 year car loan in 3 years? ›
Below are the methods you should consider to pay off your car loan faster:
- Refinance your car loan.
- Split Your Bill Into Two Biweekly Payments.
- Make a large down payment.
- Round up your car payments.
- Review additional car expenses.
However, if the burden of monthly EMI that short-term loans get problematic, choosing a long-term, anytime within 7 years would be wise. The monthly pay out would be reduced compared to short-term loans.
Is 7 years a long time to finance a car? ›
You can finance your car for as little as a few months to more than 84 months—or seven years. The most common length is 72 months—or six years—followed by 84 months. The longer your loan term, the lower your monthly payments, but the higher the overall interest.
