Why Long Period Auto Loans Are A Bad Idea

November 30, 2009

No one wants to be working to pay off their car forever. Still, lenders offer auto loans that can be paid back over long periods of time. Although this strategy may seem to lower your payments and be a good deal on a monthly basis, in the larger scheme of things it is most definitely a mistake.

Of course, a long period to one person may seem like a short period of time to another. For the reasons that follow, an auto loan repayment period of more than 5 years is considered a long period auto loan.

Calculate The Interest And You’ll Know Why It’s Bad

The interest that you pay on any car loan is a substantial amount. You always want to be aware of just how much you will end up paying in interest by the time you have paid off your loan. This is even more important to understand with long period auto loans.

When you take the time to calculate how much you will be paying on interest for your long period auto loan, brace yourself. You may very well pay thousands of dollars more in interest with this type of loan than you would with shorter period auto loans. The reason for this is that longer period auto loans possess higher interest rates. Not only do they have these higher rates but you also end up paying them for the longer period of time. All this adds up.

You’ll End Up Owing More Than Your Car Is Worth

A long period auto loan is your way to pay off a loan slowly. Unfortunately, while you are paying off that loan slowly, your car is decreasing in value quickly. You know that cars lose a chunk of their total value as soon as you drive them off the lot and continue to drop in value.

In fact, during the first year that you have you car it is likely to lose 20%-30% of its value and that is just in the first year. Because you have lost that much of the value but you have not paid off that much of the loan, you already owe more than your car is worth. This is not a good place to be in.

What If You Want A New Car?

Odds are you will not want to drive this same care around forever. With a long period auto loan you may want a new car before you come close to paying this loan off. This alone can make a long period auto loan a poor choice.

If you do decide you want a new car, you might think that you can sell your car to cover your costs. Actually, you might be able to manage this depending on how much you can get for your car at this point. If you cannot get enough for the care to make a profit or to break even then you will be the one who is paying off the difference.

Long period auto loans are generally not a good idea. There may be some fringe situations where they have their advantages but for most people in most situations long period auto loans are not worth it. If you are ever faced with an offer for a long period auto loan then look closely at the long term implications. The way things look now is not how they will look 5 years from now.