When shopping for a car, you’ll often hear dealerships promoting long-term auto loans with low monthly payments. While these offers might seem attractive, they often come with hidden financial downsides. Here’s why car dealerships push long-term auto loans and what you should consider before signing on the dotted line.
1. Lower Monthly Payments Make Cars Seem More Affordable
A longer loan term—such as 72 or 84 months—lowers the monthly payment, making expensive cars seem more affordable. This tactic allows dealerships to upsell customers into higher-priced vehicles they might not otherwise afford. However, lower payments don’t mean a better deal. You’ll end up paying significantly more in interest over time.
2. Higher Interest Profits for Lenders and Dealerships
Car dealerships often work with lenders who offer financing options, and they receive incentives for signing customers up for loans with longer terms. These loans generate more interest income for lenders, and in some cases, dealerships mark up the interest rate to increase their commission.
3. Increases the Total Cost of the Car
Long-term loans stretch out the repayment period, allowing interest to accumulate over time. Even with a relatively low interest rate, you could pay thousands more than the original purchase price by the time the loan is fully repaid.
Example:
- $30,000 car loan at 5% interest
- 5-year loan (60 months): $566 per month, total interest paid: $3,990
- 7-year loan (84 months): $424 per month, total interest paid: $5,971
- Total extra cost of a longer loan: $1,981 more in interest
4. Encourages More Car Upgrades and Add-Ons
Since long-term loans lower monthly payments, buyers may feel they can afford extra features like extended warranties, upgraded trim packages, or additional accessories. Dealerships take advantage of this by suggesting add-ons, further increasing the overall loan amount.
5. Leads to a Higher Risk of Negative Equity
Negative equity occurs when you owe more on the car than it’s worth. Cars depreciate quickly, especially within the first few years. With a long-term loan, you may be stuck paying off a car that has already lost significant value, making it difficult to sell or trade in without taking a financial loss.
Example:
- A new car loses 20-30% of its value within the first year.
- With a long-term loan, you may still owe more than the car’s value even after three or four years.
6. Makes It Harder to Upgrade or Trade In
If you want to trade in your car before paying off a long-term loan, you may still owe more than its trade-in value. This means rolling the remaining balance into a new loan, leading to an endless cycle of debt.
7. Increases the Risk of Default
The longer you’re making payments on a car, the greater the chance of financial instability. Unexpected expenses, job loss, or life changes can make it difficult to keep up with payments, increasing the risk of default and repossession.
How to Avoid the Long-Term Loan Trap
- Stick to a 3-5 year loan term if possible.
- Negotiate the total price of the car, not just the monthly payment.
- Consider a used car to avoid excessive depreciation.
- Shop around for financing before visiting the dealership to secure the best interest rate.
- Make a larger down payment to reduce the loan amount and interest paid.
Final Thoughts
While long-term auto loans may seem like an attractive way to get a new car with lower monthly payments, they often lead to paying more in interest, a higher risk of negative equity, and long-term financial strain. Always consider the total cost of ownership and opt for a shorter loan term whenever possible to save money in the long run.
-1.gif "CuraDebt")