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A longer-term auto loan can make even the most expensive car look affordable.

By stretching out a loan over many years, your monthly payment will be lower, but you’ll pay more in interest for the life of the loan. Still, people find longer-term loans attractive.

According to Edmunds.com, the average new car loan was over 71 months at the end of 2020. Experian reported almost 32% of vehicle loans made in the first quarter of 2021 were for 73 to 84 months (6 to 7 years).

The new average is well above the standard three to four-year loan that used to be typical for new car purchases. But… here’s the real math on taking a longer-term car loan:

• In general, the longer the loan term, the higher your interest rate, and the more you give away to interest. On the other hand, shorter-term loans usually qualify buyers for a better interest rate, and the loan on the vehicle is paid off in a shorter amount of time. A lower interest rate over the life of the loan can save a buyer thousands of dollars.

  Let’s use a basic example for reference. Say you want to finance a $30,000 car at 7.50% sales tax, with an annual percentage rate of 2.74% for 60 months, and a trade-in worth $5,000. You will end up paying $1,940 in interest over the life of the loan. Compare that with an 84-month loan at a 4.49% interest rate. The total interest for the life of the loan will be $4,557. That’s five years vs. seven years of payments and over double the amount of interest paid.

• There's a greater chance you'll end up upside down, meaning you will owe more to the lender than the car is worth. Cars depreciate as soon as they leave the lot, and for the first three years, most cars are worth less than what is owed on the loan. Without a substantial down payment, if you total the car or need to sell it within the first three years, you could end up receiving less than you owe on the loan.
  

• You might get stuck with a vehicle when it begins needing expensive maintenance. All vehicles need care, but costlier repairs tend to occur as the vehicle ages. When this happens, buyers usually want to trade in their vehicle, especially if they still have years of payments left on the loan. On top of being upside down, dealers may want to pay even less for your trade-in if it needs work. This is when it might become challenging to get into a newer vehicle that fits your budget, especially in today’s auto buying market. 

Financial institutions offer different auto loan terms to meet every need. There is no right or wrong term, but one could save you more money than another in the long run.

Before shopping for a vehicle, see if your financial institution offers a pre-approval process. First Florida Credit Union members can apply for an auto loan pre-approval online, speak with someone to find out exactly how much they can afford, and learn what they can expect to pay monthly.

Whatever you decide, make sure you’ve explored your options and that your auto loan fits comfortably within your budget.