Should You Finance a Car for 72 Months?

Among the various options available, the 72-month car loan has become a frequent choice due to its seemingly affordable monthly payments. This extended repayment period spreads the total cost over a longer duration, which can make higher-priced vehicles appear more accessible within a monthly budget. Understanding the implications of such a long-term commitment is important before finalizing a purchase.

Understanding the Financial Impact of Longer Loan Terms

A longer loan term, such as 72 months, can initially seem appealing because it typically results in lower monthly payments compared to shorter terms. However, this extended repayment period often leads to a significantly higher total cost due to increased interest accrual.

Most auto loans utilize a simple interest calculation, meaning interest is primarily calculated on the outstanding principal balance each month. As payments are made, a portion goes towards interest and another towards the principal. In the early stages of a simple interest loan, a larger proportion of each monthly payment is allocated to interest, with less going towards reducing the principal balance. This amortization structure means that the borrower pays more interest upfront.

For example, a hypothetical $30,000 car loan at a 6% annual interest rate paid over 72 months would result in a lower monthly payment than the same loan over 60 months. However, the total interest paid over the 72-month term would be substantially higher. Lengthening the loan term from 60 months to 72 months often comes with a higher interest rate, as lenders perceive longer loans as riskier. This higher rate further compounds the total interest paid over the life of the loan.

The slower reduction of the principal balance over an extended term means that the borrower remains indebted for a longer period. This extended debt obligation ties up a portion of one’s financial resources that could otherwise be directed toward savings or other investments. The slow principal reduction means that it takes a considerable amount of time to build equity in the vehicle.

Key Considerations Before Committing to a 72-Month Loan

One significant factor to consider with a 72-month car loan is the relationship between the loan term and vehicle depreciation. Cars generally lose value rapidly, especially during the first few years of ownership. A new car can lose an average of 16% of its value in the first year and about 60% of its original value within five years. This rapid depreciation means that the vehicle’s market value can quickly fall below the outstanding loan balance, a situation known as negative equity or being “upside down” on the loan.

Negative equity occurs when the amount owed on the car loan exceeds the car’s current market value. This can happen if a minimal down payment is made, or if the loan term is excessively long, causing the depreciation rate to outpace the principal reduction. Being in a negative equity position can create difficulties if there is a need to sell or trade in the vehicle before the loan is fully repaid. In such cases, the borrower would need to pay the difference between the sale price and the loan balance, or roll the negative equity into a new loan, further increasing future debt.

A 72-month loan also demands a long-term commitment, which requires a stable financial situation and job security over a six-year period. Life circumstances can change unexpectedly, impacting the ability to meet consistent monthly payments. Such a lengthy obligation can also affect future financial goals, potentially delaying plans for a home down payment, retirement savings, or other significant investments.

Furthermore, as a vehicle ages over a six-year loan term, maintenance and repair costs tend to increase. The average car maintenance cost can range from approximately $900 to $1,500 annually, with costs generally rising as the vehicle gets older. These growing expenses, combined with ongoing loan payments, can strain a budget towards the latter half of the loan term.

Exploring Shorter Loan Terms and Other Financing Strategies

Opting for a shorter car loan term, such as 36 or 48 months, offers distinct financial advantages. Shorter terms typically come with lower interest rates because lenders perceive less risk over a condensed period. This reduced interest rate, combined with a quicker repayment schedule, results in significantly less total interest paid over the life of the loan.

A shorter loan term also allows for faster equity building in the vehicle. Since more of each payment goes towards the principal from the outset, the loan balance decreases more quickly. This rapid reduction minimizes the risk of being in a negative equity position, providing greater financial flexibility if there is a need to sell or trade in the car sooner than anticipated.

Making a larger down payment is another effective strategy to reduce the overall cost of car financing. A substantial down payment directly lowers the amount that needs to be borrowed, which in turn reduces the monthly payment and the total interest accrued. Lenders often offer better loan terms, including lower interest rates, to borrowers who make larger down payments, as it signifies a reduced risk for them. A recommended down payment is typically at least 20% for a new car and 10% for a used car.

Beyond loan terms and down payments, other strategies can improve the financial outcome of a car purchase. Considering a less expensive vehicle, or a reliable used car, can significantly reduce the initial loan amount and subsequent interest. Saving to pay for a vehicle with cash eliminates interest payments entirely, offering the most cost-effective approach.