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Is a 72 Month Car Loan Bad?

A 72 month car loan has its good points and bad. In general, it isn’t ideal to finance a vehicle for 72 months, though it is becoming increasingly common.  In fact, the average auto loan is now over 60 months.

Pros of a 72 Month Car Loan

The primary positive to a 72 month car loan is a lower monthly payment. Because the principal is paid over a longer period of time, and therefore via a greater number of payments, each monthly installment is proportionally lower.  For this reason, many people choose to finance their new or used vehicle for 6 years because it enables them to afford more car without their payment going up so much. However, auto finance is like anything else:  there is no free lunch. We will discuss the downsides below.

Cons of a 72 Month Car Loan

There are many reasons that a 72 month car loan isn’t always the best idea. Since you can only secure a six year note on a new vehicle, the first downer is that you are guaranteed to go upside-down on the vehicle and remain that way for at least the first four years. If the vehicle is declared a total loss after an accident, the insurer will only pay you what the value is, potentially leaving you with a high balance to pay and no vehicle to secure it. To prevent that, your lender may require you carry an expensive ”gap” insurance policy, which will offset your savings on monthly payments.

Negative equity, or owing more than the vehicle’s value, is also an issue if you want or need to trade in the vehicle before the term is up. You will owe the lender the difference between what the dealer gives you for the car and what you still owe. This is known as a defiency balance, and in most states, the lender can get a judgment and garnish your wages if you refuse to pay in a timely manner. The issue is still a factor if you sell the vehicle to a private seller, such as through Craigslist or local classifieds. You may get more than you would from the dealer, but you will still owe your lender.

The next major downside to a 72 month car loan is the total interest that you will pay. A six year note typically carries a higher interest rate than a 48 or 60 month note. With that in mind, let’s say you finance $22,500 at 8 percent. Have a look at how your total interest paid breaks down for various loan terms, then imagine how much it would be if your 72 month rate was 10 percent or more.

  • 72 months…$5,093.85
  • 60 months…$4,873.13
  • 48 months…$3,865.96

Rolling Your Debt into a New Loan

As we discussed above, the extended loan term means that you will have a high balance if you trade the vehicle in during the first four years of the loan. With the high loan balance, you will have to finance negative equity on a new vehicle, making it hard to find financing. Those lenders and dealers who will finance you will “roll” your deficiency balance into your new loan. Given that even the shortest auto loans typically result in at least some negative equity, this old debt will only compound how upside down you are. You could end up in a very bad way, driving a car that is worth thousands less than what you owe.

If You’re Set on 72-Month Financing…

In that case, the most important thing is that you offer at least 20% down on your new vehicle. This will go a very long way in preventing you from being upside down–or at least reducing the amount. Secondly, you need to be one of those people who drives their vehicles for as long as they can, as opposed to trading them in every 2-3 years. That way, you effectively elminate one of the ways in which negative equity becomes an issue. Lastly, you probably need to carry gap insurance, though if you are a person with a good bit of savings and/or disposable income, it may be less expensive to simply save some money in reserve to pay your deficiency balance in the event of an accident.

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