Introduction
Financing a car for 72 months – or six years – seems like a great way to get a new car without breaking the bank. But is it really the best option for you? Before making such a long-term commitment, it’s important to understand the financial implications of a 72-month car loan.
Analyzing the Financial Impact of a 72-Month Car Loan
When financing a car, two key factors to consider are the interest rate and total cost. With a longer loan term, you will typically have a higher interest rate and pay more in interest over the life of the loan. According to Experian Automotive, “The average interest rate for a 48-month new car loan was 5.18% in the third quarter of 2019, while the average interest rate for a 72-month new car loan was 6.37%.” This means that if you opt for a 72-month loan instead of a 48-month loan, you could end up paying an additional $1,000 to $2,000 in interest over the life of the loan.
In addition to the interest rate, you should also consider the monthly payment amount. A longer loan term means lower monthly payments, but it also means you’ll be making payments for a longer period of time. According to Experian Automotive, “The average monthly payment for a 48-month new car loan was $545 in the third quarter of 2019, while the average monthly payment for a 72-month new car loan was $408.”
Examining the Pros and Cons of Long-Term Car Loans
There are both pros and cons to financing a vehicle for six years. One of the benefits of a 72-month car loan is the lower monthly payments, which may make it easier to fit a car into your budget. However, there are a few drawbacks to consider as well.
Lower Monthly Payments
As mentioned above, one of the biggest benefits of a 72-month car loan is the lower monthly payments. This can make it easier to afford a more expensive car, or to simply fit a car into your budget without stretching your finances too thin.
Negative Equity
Another potential downside to a 72-month car loan is the risk of negative equity. Negative equity occurs when you owe more on the car than it’s worth. This can happen if you don’t make enough payments to cover the depreciation of the car over time. According to Edmunds.com, “A typical new car loses about 10 percent of its value in the first month and 20 percent in the first year.” If you finance a car for six years, you may end up owing more on the car than it’s worth.
Lower Credit Score
Finally, it’s important to note that taking out a 72-month car loan could potentially have a negative impact on your credit score. According to FICO, “Length of credit history accounts for 15% of your FICO® Score.” This means that a longer loan term can lead to a lower credit score, as you’ll be taking on more debt.
What to Consider Before Taking Out a 72-Month Auto Loan
Before taking out a 72-month car loan, there are a few things you should consider. It’s important to make sure you’re in a good financial position before committing to such a long-term loan.
Your Financial Situation
First and foremost, it’s important to evaluate your financial situation. Are you able to afford the monthly payments and other associated costs (such as insurance and maintenance)? Can you afford to pay off the loan early if necessary? Answering these questions will help you decide if a 72-month car loan is right for you.
Your Credit Score
Next, you should consider your credit score. According to Experian, “If you have a high credit score, you can usually qualify for a better rate and terms on a car loan.” If you have a low credit score, you may not be eligible for the best interest rates and terms. In this case, it may be best to focus on improving your credit score before taking out a 72-month car loan.
Your Ability to Make Payments
Finally, you should consider your ability to make payments. Even if you can afford the monthly payments now, will you still be able to afford them five or six years from now? Life can be unpredictable, so it’s important to make sure you have a plan in place for making payments in the future.
Considering the Risks of Financing a Vehicle for Six Years
When considering a 72-month car loan, it’s important to weigh the risks as well as the benefits. Here are a few potential risks to consider:
Extended Repayment Period
One of the main risks of a 72-month car loan is the extended repayment period. While this can be beneficial in the short-term, it can also mean that you’ll be making payments for a longer period of time. This can be a significant financial burden if you’re unable to make payments or if you need to refinance the loan at some point.
Potential for Default
Another potential risk of a 72-month car loan is the potential for default. Defaulting on a loan can have serious financial and legal consequences. Therefore, it’s important to be sure that you can make the payments before taking out a 72-month loan.
Higher Interest Rates
Finally, it’s important to note that longer loan terms typically come with higher interest rates. This can add significantly to the total cost of the loan, so it’s important to shop around for the best rate.
Is a 72-Month Car Loan Right For You?
Ultimately, the decision to take out a 72-month car loan is up to you. There are both benefits and drawbacks to consider, and it’s important to weigh them carefully before making a decision. Here are a few things to keep in mind:
Weighing the Benefits and Drawbacks
As mentioned above, there are both benefits and drawbacks to taking out a 72-month car loan. Be sure to weigh the pros and cons carefully before making a decision. Additionally, it’s important to consider your current financial situation and your ability to make payments in the future.
Alternatives to Consider
If a 72-month car loan isn’t right for you, there are other options to consider. For example, you may want to consider leasing a vehicle instead of buying one. Leasing can be a great way to get a new car without having to make a long-term commitment. You may also want to consider a shorter loan term, such as 48 months.
Conclusion
Financing a car for 72 months can seem like a great way to lower your monthly payments. However, it’s important to consider the financial implications of such a long-term loan. A 72-month car loan can come with lower monthly payments and a higher interest rate, as well as the potential for negative equity and a lower credit score. Ultimately, it’s up to you to decide if a 72-month car loan is right for you. Be sure to weigh the pros and cons carefully before making a decision.
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