Car Loan Length Advice
Should You Borrow For: 36, 48, 60 or 72 Months?
It's a tough question. Never sign up to a loan longer than 48 months. Since cars are getting outrageously expensive so the dealers have made 60 and 72 month loans or 5 year leases popular. Do you want to be paying interest for 5 or 6 years? The warranty will run out in 3 years and that's when the trouble starts. You'll still be paying off your car, while racking up expensive repair bills. Ignore sales talk that your lower priced 72 month payments are better. They just want to get the car sold. Pay off your loan as quick as you can so you won't be upside down when you trade it in. That might not be possible with the income at your disposal, but at least try.
The following table shows a $20,000 loan at 8%, with monthly payments in 1 year increments from 12-72 months. Note how the payments drop if you borrow over a longer period of time, but the interest goes sky high! Borrow $20,000 at 8% APR for 72 months and you'll pay $5,248 in interest! This adds $73 more per monthly payment. If you paid this car off in 36 months, you only pay $2,562 in interest, saving $37 a month.
You must be aware about the amount of interest you end up paying on a 72 month loan and how long it takes you to build up equity in your car. If you decide 3 years into the loan that you want to trade your car in for a new one, you will be in for a very unpleasant surprise. A huge portion of each monthly payment has been used to pay off the interest. It's quite possible that after making payments for 36 months you still owe more than the car is worth. This issue is the reason why I don't recommend taking out a loan greater than 48 months. Ideally, a 36 month loan will help you leave some margin to account for emergencies.
| Total Loan Cost For A $25,000 Loan at 7% Interest | ||||||
| Months | 12 | 24 | 36 | 48 | 60 | 72 |
| Monthly Payment | $2,163.17 | $1,119.31 | $771.93 | $598.66 | $495.03 | $426.23 |
| Total Interest | $958.02 | $1,863.55 | $2,789.39 | $3,735.49 | $4,701.80 | $5,688.21 |
| Total Loan | $25,958.02 | $26,863.55 | $27,789.39 | $28,735.49 | $29,701.80 | $30,688.21 |
See how fast the interest piles up on these longer term car loans!
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