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Car Loans: Average Loan Term Growing, but Is It Smart?

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author photo by Doug DeMuro August 2013
  • Average car loans increasing in length
  • 6- to 10-year loans becoming popular
  • Long-term loans are rarely a savvy buying decision

The average length of a car loan in the U.S. is growing. That's the latest from The Detroit News, which recently reported that 6- to 10-year loans are becoming increasingly popular with car shoppers.

According to The Detroit News, such loans can be beneficial to both automakers and car shoppers. For shoppers, it's good news because longer terms mean lower payments. And for automakers, having lower payments means buyers are more willing to consider a pricier car.

But is a longer car loan a smart financial decision?

In many cases, the answer is no. A major reason is that financing a car over a longer term often results in higher interest rates. That means you might end up paying more for a car in the long run, even if your monthly payment is lower.

For example, consider one car that costs $250 per month for four years, or another that's $220 per month for six years. While the second choice may seem tempting because of the lower payment, the first car saves shoppers nearly $4,000. In other words, sometimes a higher payment is better.

Financing a car over such a long term also can be a bad idea if you enjoy switching cars every few years. With a 7- or 8-year loan, shoppers typically spend the first years paying interest. That means they can be "underwater" on the loan -- meaning they owe more than the car is worth -- for much longer than they would with a shorter loan term.

Of course, sometimes long-term financing can be a good idea. The Detroit News reported one case in which a driver financed a new car over six years at 1.89 percent interest. The low rate meant he paid just $370 more over the six years than a comparable 4-year loan, but he saved around $130 per month.

Such stories certainly happen, but they're rare. Our advice: Run the numbers. If a long-term loan makes financial sense, don't be afraid to consider it. But don't pay too much over too long just because you're excited to drive off the lot in a new car right away.

What it means to you: Although long-term car loans are becoming more common, we suggest avoiding them unless the numbers make sense.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Car Loans: Average Loan Term Growing, but Is It Smart? - Autotrader