Should You Get a 72-Month Car Loan?

Believe it or not, there was a time when most car buyers bought their cars with cash. Fast forward to today, and getting a loan to buy a car is pretty much expected. The catch is getting a loan that fits comfortably into your monthly budget. Agreeing to a 72-month car loan can help make your monthly payments more affordable, but is it wise to get a 72-month car loan? 🤔

We’ll explain why a 72-month car loan can be a bad idea and offer some alternatives.

What Is a 72-Month Car Loan?

When you finance a car, you take out an installment loan and make fixed payments that include principal and interest over a predetermined repayment period. Car loan repayment periods range from 24 to 84 months (or 2 years). The standard car loan term is around 60 months. As car prices continue to drive up, 72-month loans are becoming popular.

Why take out a loan that’s 72 months or more? Well, the longer your loan repayment period is, the lower your monthly auto payments are.

It might be okay to finance a car for 72 months (or may be your only option) if you have a tight budget, bad credit or don’t qualify for a better loan term. But there are downsides to long-term loans.

Why Is a 72-Month Car Loan a Bad Idea?

Long-term loans are on the rise; just look at the stats. At the start of 2022, 73% of new car buyers got loans over 5 years.^[1]

But not all trends are meant to be followed. Remember the pencil-thin, dramatic eyebrows from the 90s? Some of us didn’t fare as well as Gwen Stefani or Rihanna. 😅

If you do hop on the 72-month loan trend, you should know it could make it harder to:

• Work toward other financial goals: The money you’re spending on car loan payments for 6 years can’t be used to save for a home or pay down other (maybe higher-interest) debt.
• Buy a different car: Starting a family, moving or starting a new job may require a different car. But if you’re stuck with a long-term loan, it can be harder to buy a new car.

Here are some more reasons why a 72-month car loan can be a bad idea:

Going underwater or upside-down

You are underwater or upside-down when you owe more on your car loan than the car is worth. New vehicles depreciate quickly in their first year (read: lose value), and that slide in value continues year after year. The longer you hang on to your car, the more the car depreciates, and you could end up with a loan balance that’s bigger than the car’s value.

Getting a long-term loan for an older car increases the chances that you’ll be underwater until your loan is paid off.

Negative equity

You build equity each time you make a payment, and your car loan balance gets smaller than the car’s value. As you pay the loan, you get closer to owning the vehicle outright. But a 72-month loan makes it easier to end up owing more than your car is worth – and you’d find yourself with negative equity in your car.

Negative equity will complicate everything if you decide to sell or trade in your car for a new one. Rolling over your outstanding loan balance to a new car loan isn’t recommended because you’ll start with negative equity on the car before you ever take the wheel.

Higher interest rates

The longer the loan term is, the higher lenders will hike their annual percentage and interest rates, especially when loan repayment terms push past 60 months.

The average interest rate for a 72-month new car loan is about 5.4% and 9.2% for a used car loan. It’s 5.2% for a 60-month new car loan.^[1] This may not seem like a big difference until you start calculating the amount you’ll pay in interest over 12 more months.

Paying more interest

Not only are 72-month auto loan rates higher, but you pay more interest than you would if you borrowed the same amount of money with a shorter-term loan.

To show you what that might look like IRL, we’ll compare loan interest rates on a fictional set of wheels. Let’s say you’re interested in buying a $20,000 car. If you go with a 60-month loan, your interest rate will be 5.2%, and you’ll pay about $2,756 in interest on the loan. If you go with a 72-month loan, your interest rate will hover around 5.4%, and you’ll pay about $3,459 in interest. As you can see, that extra 0.2% in interest will cost you $700 more with a 72-month loan.

Even with the pro of monthly payments decreasing when you jump from a 60- to a 72-month loan, a major con is the amount of interest you pay increases. You end up paying more for the car over the life of the loan.

Increased chance of default

The explosive mix of rising car prices and longer-term loans with high-interest rates can potentially blow up your budget – putting you at a higher risk of default.^[2]

Affordability of costly car repairs or expenses

On top of 6 years’ worth of monthly car payments, you’ll probably run into costly repairs if your car’s warranty expires before you can finish paying off the loan. As cars age, they usually need more expensive maintenance, like new tires, brakes, or shocks. Cue the dollar signs: 💲💲

Do you think you’ll be able to cover the cost of upkeep and your monthly payments as the car ages?

With a shorter-term loan, you won’t need to make that calculation. The car should be paid off before the warranty expires and requires costly repairs and maintenance.

What Are Some Alternatives to a 72-Month Car Loan?

Don’t stress yourself out (or your budget) by agreeing to or extending your loan repayment to 72 months to make your monthly payments more affordable. Consider the following alternatives:

Buy a used car

Do you need the newest model on the lot? Can you opt for a used vehicle or a cheaper car? The less money you borrow, the smaller loan you take out. And the more manageable the monthly payment.

Lease the vehicle

If your heart is set on a specific car, leasing from a dealership may be more affordable than buying because leases usually have lower monthly payments than loans. Plus, lease contracts are only a few years long. Getting a new car and avoiding rolling over a loan balance is more accessible with a lease.

Make a larger down payment

A larger down payment will decrease how much you borrow and may help you avoid long-term financing. If you need to take out a 72-month car loan, a larger down payment can help you avoid being underwater because you’ll start with some equity in the car.

Refinance

You can refinance a car loan for a shorter repayment period or a lower interest rate. With a lower interest rate, you’ll pay less interest than you would have with the rate on the original loan. You’ll need good credit scores and solid credit history to qualify for better loan terms.

You’ll have a better chance of refinancing if your credit scores are higher than when you took out your original loan, and you don’t have negative marks on your credit reports.

Don’t Go Underwater

Unless you’re one of the Beatles, you’re probably not driving a yellow submarine under the sea (check here if you’re curious). You should avoid going underwater with a car. It’ll ruin the upholstery and drown your finances, which is a more significant risk with a 72-month loan. 👎

Buying a used or cheaper car won’t necessarily rescue you from going underwater. If you still need a 72-month loan, that may be a sign that it’s not the right time to buy a car.If you have a 72-month loan but don’t qualify for refinancing, try paying extra on your car loan to pay it off faster.