With the average cost of a new car around $50,000, according to Kelley Blue Book, it can be hard to find a car within your budget.
With PCS moves and other military expenses, it can be especially tough for military service members. That’s why financing is so popular; the option to make affordable monthly payments on a vehicle can make ownership more budget-friendly.
But what if those monthly payments are only affordable because they are stretched over seven or eight years?
That’s how long some traditional automotive loans are these days, which is a large increase over the once-typical 48- or 60-month loan term.
If you’re in the military and you’re thinking about taking out an ultra-long loan, keep reading to learn a few reasons why you should think twice before doing so. These loans are riskier than you think.
Rapid Depreciation
If you consistently move throughout your time in the service, financing a car and holding onto it for as long as possible is a good idea.
However, if you’re paying monthly installments for a car loan during that time, you not only have more living expenses every month, but you’ll also run the risk of your vehicle depreciating quicker than you can pay off the loan.
This rapid depreciation means that you will be “underwater” on the vehicle, so if it gets stolen or crashed during your ownership, you could end up owing more to the bank than the car is worth, even though you will no longer have a car to drive.
In this case, an old formula in the car industry you can use is the “20-4-10 rule,” which means that you should make a 20 percent down payment, take a 48-month (four-year) loan term, and spend no more than 10 percent of your budget.
This way, you’ll pay off the loan quicker and will be less likely to be underwater on your car’s value.
Lower Payments Do Not Mean You’re Saving Money
Another risk to taking out a 72- or 84-month loan is the amount of interest you will pay. Shoppers prefer the longer loan terms for their lower monthly payment amounts, thinking that they will have more money freed up to save or spend elsewhere.
While that is technically true, the silent killer is the interest that’s slowly building as you make these lower monthly payments, which means the money you’re saving monthly can be offset by the amount of interest you’re ultimately paying during the length of the loan.
For example, if you have a car loan for $50,000 and are paying 6.5 percent interest over 60 months, you’ll end up paying $5,290.60 of total interest.
But if you have a 72-month loan with a 7.9 percent interest rate for the same amount, you’ll pay $10,481.67 in interest, which is nearly double the amount with a small percentage increase and one more year on the loan.
A 72- or 84-Month Loan Is a Long Time
The truth of the matter is that a 72- or 84-month loan means six or seven years of your life will go by during the time you’re making payments for a car.
A lot can change in six or seven years, which includes your interest in the car you financed, where you’re stationed, and other important life events.
During this time, you’re still paying off the cost of the car, a car that can break down and cost you hundreds or even thousands.
This adds even more to your financial stress, which could include the loan payment, your insurance payment, and repair costs every so often, making your total cost of owning a car that much greater.
What Should You Do When Financing a Vehicle?
Instead of taking out an ultra-long loan that lasts for six or seven years, consider saving more for a down payment before shopping for a vehicle and applying for a four- or five-year loan instead.
The higher monthly payment you would normally get with a shorter-term loan will be offset by the larger down payment amount, which means you can save more every month while saving on the total interest paid.
Refinance Your Long Car Loan
If you have already taken out a 72- or 84-month car loan, you can always refinance it and shorten your loan term. Doing so can also yield a lower interest rate, depending on your current credit situation.
Ultimately, service members considering financing a new or used vehicle for a long period of time may want to consider alternatives.
There is plenty of risk involved with these longer loan terms, including quicker depreciation, negative equity, and certain life events occurring during that time, which could end up costing you more money in the long run.
If you want to know more about loan terms before making a commitment, be sure to check out this auto loan calculator.
