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Longer Loans Cost More. So? Comments

  • By DailyWorth Team
  • January 28, 2013

Red Car

It’s car-buying season, and new data show that a growing number of Americans are choosing longer car loan terms—as long as seven years. Most personal finance advice would steer you away from the longer loan—because in the end you’ll typically pay thousands more in interest.

True. But let’s consider how much a $20,000 loan would cost, at 3.77% interest (the national average for auto loans) with different loan terms:

Year Monthly Payment Total
3-year $588 $21,184
5-year $366 $21,975
7-year $271 $22,786

In the end, a seven-year loan is going to cost you about $1,600 more than the three-year loan, but the payment is about 50% less each month, in our example. This is where your personal definition of “affordable” comes in. You can do the math on whether you want to pay more now, or over the long term. But if you want to sell the car in five years, you may owe more than it’s worth (see box above). Out of the Box
By the time your seven-year loan is paid off, your car will be...seven years old. If you must take out a long-term loan, check the resale value of a seven-year old vehicle in your make and model on edmunds.com.

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