Many auto lenders and credit unions are now offering auto loans of up to 96 months (8 years). Industry-wide, repayment terms have been growing longer and longer than ever before, with the average new vehicle loan now topping 65 months. From the consumer’s perspective the appeal of such loans is quite clear: lower monthly payments. However, like anything, there is no free lunch. We’ve covered 84 month terms in the past. Today we take a look at the upsides and downsides of the 96 month auto loan.
Longer Loans = Lower Payments
This is the main reason that consumers opt for a longer-term financing: it brings down the monthly payments. For example, let’s look at the monthly payment for a $25,000 car financed at 6% APR at varying repayment periods:
- 36 months: $760
- 48 months: $587
- 60 months: $483
- 72 months: $414
- 84 months: $365
- 96 months: $328
As you can see, each year tacked on to the finance term brings down the monthly payment significantly. In fact, financing a vehicle for 96 months gives a payment that’s just 43% of the 36-month payment. However, extending the payment term out to 8 years brings a number of complications into play.
96-Month Financing: The Risks
- Maintenance: this is less of a concern that it used to be, given the high-mileage performance of today’s autos, but it’s still prudent to consider that by the time the vehicle is paid off, it will be 8 years old (if bought new). This leaves plenty of time for major repairs to crop up before the vehicle is ever paid off. That means potentially balancing the costs of both maintenance and financing simultaneously.
- Interest: with a 96 month loan, you’ll pay higher interest in two ways. For one, the longer the loan, the higher the interest rate you’ll be charged. So, from the beginning, you’ll be paying a higher rate. What’s more, the extended life of the loan means you’ll be paying for a longer time. The result in significantly more interest paid–the cost that comes with those low monthly payments. For example, in the example above, you would pay around $2400 in total interest financing for 36 months, and $6500 financing for 96 months!
- Negative Equity: although a longer term generally means lower monthly payments, it also translates into less of the car being paid off over a longer period of time, leading to a buyer being underwater with his loan for years. Many buyers are surprised to learn that they cannot trade in their cars if they owe more on the car than it is worth. In many cases, to cover this gap between what is owed on the vehicle and what it’s worth, the lender will require you to carry GAP (Guaranteed Auto Protection) coverage.
Who Does it Work for?
However, there are scenarios when such a loan is a viable option. First and foremost, these loans are best for people who intend to “drive the wheels” off of their vehicle. In other words, they have no plans whatsoever of trading in their vehicle before it is fully paid off. Trade-ins are problematic with long-term financing because of negative equity.
Secondarily, these loans are best for people who are financially comfortable, having the money on hand to handle major repairs and/or an outstanding balance on trade-on.
Lastly, loans of 96 to even 100+ months are often a viable option for those investing in classic cars, which do not depreciate like regular vehicles. The lack of depreciation eliminates problems with negative equity, and maintenance issues are less of a concern because such vehicles are generally garage-kept and driven a lot fewer miles per year