Why should you not finance a car for more than 4 years?
Lenders usually charge higher interest rates for long-term auto loans. Because there's more time for a borrower to default on the loan, lenders consider longer-term loans to be a higher risk. To compensate for that risk, they often charge a higher interest rate when you stretch out the loan term.
You'll make smaller monthly payments
A longer loan term can mean lower monthly auto loan payments. For example, say you're financing a $30,000 new-car purchase over five years with a 3% annual percentage rate, or APR, with no down payment in a state with no sales tax. Your monthly payments would be $539 each.
You might find that some lenders cap loan terms at 84 months, while others will give you a loan for up to 96 months. Historically, used car loans had 72-month limits. But as used cars gained popularity, it prompted lenders to began offering loans of 84 months and even longer, to meet consumer demand.
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. You can find a number of lenders that offer auto loans over an 84-month period — and some for even longer.
Unless you're looking for a classic car to rebuild or restore, don't ever buy a used car that doesn't start or has not been driven in a long time. If a car was in decent condition before it was stored, it won't take much to reanimate it.
This is because older vehicles are financed by borrowers with lower credit scores, have lower resale values, have more mechanical issues, have higher repossession rates, and carry higher interest rates due to increased lender risk.
Overall, if you're choosing between the two, a 60-month loan is better because you'll pay off the loan faster with a lower interest rate, and you'd be paying less overall for your car. If you'd like to make more auto loan comparisons, this article on common car loan terms can help.
Financing for Older Cars Can Be Harder to Get
If you are unable to pay your monthly loan payment due to these expenses, this could lead to repossession and a negative impact on your credit. If your car is repossessed and no longer functions or holds its predicted value, your lender may end up with a loss on your loan.
Drawbacks of long-term car loans
Most car buyers want lower monthly car payments. Although extending your loan over a longer term reduces your monthly payment, your auto loan length can affect the total cost of your loan and possibly the value of your car.
Generally, you should pay off your car loan early if you don't have other high-interest debt or pressing expenses to worry about. But if that money could be better spent elsewhere, paying off your car loan early may not be the best choice.
Is 4 years too long for a car loan?
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.
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.
There are no legal restrictions to paying off your auto loan early but it may come with fees from your auto loan provider. Paying off a car loan early can be a good option to save money and reduce your debt, but whether it is a good idea depends on your unique financial situation.
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.
If you have been qualified for a $30,000 car loan, the monthly payment depends on the amount of the down payment, interest rate, and loan length. For example, with a down payment of $2,500, an interest rate of 5%, and a loan length of three years, you will have to pay $824.20/month.
Disadvantages of a Larger Down Payment
The two biggest cons of making a down payment that's around 50 percent are: More money down doesn't lower your interest rate – Bad credit car buyers get higher than average interest rates, and it's extremely rare that a larger down payment can lower it.
Beyond just your oil, all of your vehicle's fluids can become compromised when left sitting for too long. Your vehicle relies on coolant, transmission fluid, power steering fluid, brake fluid, and differential fluid, among others. Any issue with these fluids can present trouble for your vehicle.
But when it comes to cars, owning a car well past the 10-year mark should no longer be a badge of honor. Due to safety reasons, if you have the money, you should probably start looking for a new car after a decade.
Extended periods of inactivity can negatively impact a car in the following ways: Battery life: A car may lose its charge if left stationary for longer than normal. Tire condition: Tires can lose air pressure, develop flat spots, and deform if subject to long-term storage.
If you love all the latest bells and whistles, an older car isn't likely to offer you much. If that's not something you're willing to compromise on, you might be better off buying a new car — or even leasing it. A used car might require higher maintenance costs.
Is it better to finance a newer or older car?
If you're planning to finance your car, you'll be more likely to get a lower interest rate on a new car than a used one. New cars have a higher resale value and are less likely to have mechanical issues. That means the lender is less likely to lose their investment if you can't make your payments.
A dirt-cheap old car will typically have a lot of worn-out and broken parts that will be expensive to repair. Parts can also be difficult to find. The car can also break down often and it can even be a safety issue. You're usually better off buying a quality, late-model used vehicle than a cheap, old clunker.
For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.
You shouldn't take a 100% mortgage loan when you can afford to put 20% down. The one possible exception is if the amount that would go into down payment can be invested to earn a very high return.
PenFed Credit Union is the best overall auto loan lender thanks to its wide selection of loan types and competitive rates, according to our research. It offers rates for used cars as low as 6.49%, and another one of our picks, OpenRoad Lending, offers rates as low as 1.99%.
