How long should my car loan be?
You may have lower payments for a longer-term car loan, but that may translate into a financial risk.
When it comes to decisions on buying your next car or truck, it pays to put as much thought into the length of your financing as you do colors and miles per gallon.
The longer the loan, the lower the payment. That may sound like a bargain until you add up the total payments you'll make over the term of the loan.
For example, look how the numbers stack up on a hypothetical $25,000 loan at 4.5% APR:
| Term | Monthly payment | Total cost |
|---|---|---|
| 48 months | $570.09 | $27,364.32 |
| 60 months | $466.08 | $27,964.80 |
| 72 months | $396.85 | $28,573.20 |
You may be charged a higher rate on longer loans, reflecting what the lender loses if you fail to pay everything back.
The perils of going upside down on a car loan
Aside from raising the true, bottom-line cost of your car, longer loans also put you at risk of being "upside down." That's the term used to describe someone who owes more on their car than it's worth.
Being upside down could impact you negatively if and when you sell your car or if your car is a total loss after an accident. Keep in mind when you sell your vehicle, the loan balance must be paid off immediately. In such a situation, you may be tempted to roll your old debt into the new loan, which could create even further financial woes.
Consider an uglier scenario: After an accident, your car is declared a total loss. You'll get cash for the "actual cash value" of your car but will have to immediately come up with the cash to pay the difference between that and what you still owe.
The rewards of staying right-side up on a car loan
Car ownership is more satisfying when you own your wheels free and clear. You should still plan for ongoing expenses like maintenance and registration costs.
Not having a monthly car payment can feel rewarding. Having a few years without a car payment could reduce stress and free cash up for you to pursue other financial goals.
A paid off car is an asset. And when you plan to replace your vehicle in the future, chances are that your current ride has some value or equity that you can use towards your new vehicle. Whether you plan to trade-in your car or sell it, having a paid off car can keep you in the driver's seat when negotiating your next vehicle purchase.
To stay right side up, keep your loan length as short as possible. As a best practice, avoid finance terms longer than 60 months.
Alternatives to a longer car loan
Everyone wants a lower monthly payment, but there are better ways to accomplish it than by choosing a longer loan term.
Spend less.
The most responsible way of lowering your monthly payment is to choose a less expensive model. You may also consider buying a used car instead of a new one. Note that while used car interest rates are typically higher, the price of a comparable used model could be much lower.
Make a larger down payment.
Another smart way of decreasing your monthly payment is by putting more money down. To do this, you may want to put off your purchase for several months while you save.
The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.