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Frequent Contributor
currentlywinning
Posts: 485
Registered: ‎01-14-2012
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Whats wrong with 72 month car loans???

They make monthly payments lower, but whats the down side of things?

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Mike360
Posts: 433
Registered: ‎03-19-2010
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Re: Whats wrong with 72 month car loans???

Upside Down – Unfortunately, there is a big downside to financing a car for 6 years especially if the down payment was low or nonexistent. As all vehicles immediately depreciate once they leave the dealer’s lot, right away car owners are faced with a deficit: their loan is worth more than the car. For more than half of the time that the car is owned borrowers are “upside down” in their loan. This means if they were to sell the car or trade it in, they wouldn’t get enough money on the car to pay off the loan. For the person who plans on keeping the car for the long term then that shouldn’t be a problem; for mostly everyone else it could be one

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pipeguy
Posts: 633
Registered: ‎10-31-2011
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Re: Whats wrong with 72 month car loans???

Dealers love "payment buyers" which offer much higher total interest in addition to negative equity. You'll note that on longer terms (60-72-84 months) the dealers will push "Gap Insurance" which is another big money maker. In theory Gap Insurance covers you when you are upside down (owe more than the car is worth), the problem is that it only covers the lender not you directly. There would be little need for Gap Insurance if it wasn't for longer term car loans.

 

Go to any of many "auto loan" sites, Capital One, PenFed, Ally (old GMAC), etc and use car their loan calculator (free online). I think you'll see that the difference between a 60 and 72 month loan is NOT in your best interest: I don't know if you can find a lender that'll go 84 months on only $25k. Of course if you take advantage of a special interest rate like PenFed at 1.99 % promotion, longer payments make sense if you are going to keep the car a long time and cash flow is important to you.

 

Example: $25,000 loan at 7.0%: 60 months = $495 a month ($4700 full term interest), 72 months $426 a month ($5067 interest), 84 months $377 a month ($6668 interest).

 

 

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pizzadude
Posts: 9,217
Registered: ‎01-28-2010
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Re: Whats wrong with 72 month car loans???

+1 to the excellent advice from pipeguy and mike. You don't want to be in a position where you have to bring money to the table just to sell your car. And if you had to roll over the unpaid balance into a new loan you would be even more upside down. A lot of people get onto trouble this way.
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Revelate
Posts: 8,894
Registered: ‎12-30-2011
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Re: Whats wrong with 72 month car loans???

I'll bring one flipside to the good advice already given: longer terms often mean lower APR.

 

If you're planning on paying more than the minimum, or are fairly confident you'll be able to pay the car off early without pre-payment penalty (absolutely check your loan agreement before you sign, and ignore GAP insurance in either case), then term length really doesn't matter and you can save money by getting the lower APR.

 

In either case though, in the event of a new car loan, if you're not putting anything down, any loan will take you underwater for an extended period of time anyway if you're just making the minimum payments.  If you're putting down a hefty downpayment which skews the amortization / depreciation curve, then the longer term length isn't quite as bad especially if it gets you a lower APR to begin with.

 

In my case I'm going to be refinancing in 4-5 months: depending on the loan agreement I'll take a 6-7 year one (assuming I can find one at a competitive rate and on a used car), as there's no way I'm going to take it to term.  Stupid FICO tricks which proably aren't worth it in the long run, but might make a marginal difference and don't cost me much.

 

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currentlywinning
Posts: 485
Registered: ‎01-14-2012
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Re: Whats wrong with 72 month car loans???

Thank you all for your insight. I am learning so much being here. I will be putting down a $3500 DP on something 15k or less. 

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cassembler
Posts: 470
Registered: ‎02-07-2011
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Re: Whats wrong with 72 month car loans???

To me the decision is purely how much the total out-of-pocket will be, plus how long I'll need full coverage (insurance).

 

Purely for illustration:

A 15k note, at 4, 5, and 6 years. Assume 5% APR (all figures rough estimates):

4 yr: $1,580 in interest

5 yr: $1,980 in interest

6 yr: $2,390 in interest

 

That extra $800 over six years probably isn't a huge deal, but two extra years of having no car payment, or full coverage insurance requirement, is pretty darn nice!

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Established Contributor
pipeguy
Posts: 633
Registered: ‎10-31-2011
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Re: What's wrong with 72 month car loans???


currentlywinning wrote:

Thank you all for your insight. I am learning so much being here. I will be putting down a $3500 DP on something 15k or less. 


Considering the low limit of your loan, you might not be able to get a 72 month used car loan for $12-13k. I just checked the PenFed site and they offer up to 48 months on under $10k, over $10k is limited to 60 months and the 60 month term is higher (APR interest rate) than the 36/48 term. I know lenders look at the current "value" of any used car and with $3500 down you are looking at a note in the $12.5k area (taxes, tags, title, fees add to the purchase price) and that's pretty low for a 72 month loan. Also a $15k used car would be a 3-4 year old car in most cases, with a 72 month loan its going to be a 9-10 year old car by the time it's paid off.

 

The reason I mentioned that lenders look at the market value of the used car is if you want to refi in the future for a better rate or for a shorter term, the new lender will require the car to be "worth the loan" per se, at 72 months I doubt that'll happen.

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Frequent Contributor
currentlywinning
Posts: 485
Registered: ‎01-14-2012
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Re: What's wrong with 72 month car loans???

Thanks again guys. Im going to my local CU to see about a loan this week. Hopefully I get the car I want at a price I can afford!

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Regular Contributor
geronimo2008
Posts: 183
Registered: ‎07-21-2007
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Re: Whats wrong with 72 month car loans???

My experience is that longer terms mean the same or higher APRs not lower .


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