NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months. These maximums can help you avoid some of the negative outcomes of long-term loans.
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go. You can learn more about car loans here.
Since a new car starts losing value the moment you drive it off the lot, an 84-month auto car loan can also put you at higher risk of going upside down on your loan. That means you may end up with negative equity — owing more than your car is worth.
If the car has not been accurately valued or no longer functions as it should, the lender may not fully recover their investment. Used cars can be great options for some borrowers, but it's important to understand that the interest rate and other loan terms may not be as favorable as those offered on new cars.
If you're planning to finance your car, you'll be more likely to get a lower interest rate on a new car than a used one. New cars have a higher resale value and are less likely to have mechanical issues. That means the lender is less likely to lose their investment if you can't make your payments.
Stuck with the same vehicle
Before signing off on a car loan that's as long as 84 months, make sure you've found the right car for your needs and consider whether you will want to drive that same vehicle throughout the entire term. Seven years is a very long time. Your needs and circumstances could shift.
Provided the down payment is $5,000, the interest rate is 10%, and the loan length is five years, the monthly payment will be $531.18/month. With a $1,000 down payment and an interest rate of 20% with a five year loan, your monthly payment will be $768.32/month.
Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment. If that leaves you feeling you can afford only a beat-up jalopy, don't despair.
Car payment statistics
The average monthly car payment for new cars is $726. The average monthly car payment for used cars is $533. 39.20 percent of vehicles financed in the third quarter of 2023 were new vehicles. 60.80 percent of vehicles financed in the third quarter of 2023 were used vehicles.
In early 2023, average rates for new and used vehicles were 6.58 percent and 11.70 percent, respectively, according to Experian. The third quarter brought similar rates, 7.03 percent for new and 11.35 percent for used.
Making a large down payment on a car may also limit your financing or refinancing options. Some lenders may not offer financing if you propose to make a down payment that the lender deems too large. You might not meet a lender's financing requirements if you're seeking to put 90% down on a vehicle that costs $25,000.
According to consumer credit reporting company Experian, the average auto loan term in the third quarter of 2023 was 68.26 months for new cars and 67.57 months for used cars. The average car lease was 36.18 months.
Financing an older car can be a viable alternative for some car shoppers, although it might not be as simple as financing a new one. Getting a loan can be harder, interest rates could be higher, and operating costs have the potential to offset any initial savings.
People with excellent credit qualified for rates around 5.61 percent, while people with bad credit had an average new car rate of 14.17 percent. Rates for used cars were higher — 11.35 percent across credit scores. And the average rate for bad credit was a sky-high 21.18 percent.
You've checked the prices of similar vehicles online. Quote the prices, and ask if the salesperson can do better. Make a realistic offer. A savings of 5% or so below the market price is a reasonable starting point for negotiations.
Paying cash may hinder your chances of getting the best deal
"When dealers are negotiating the purchase price, they anticipate making money on the back end, via financing," Bill explains. "So if you tell them up front you're paying cash, the dealer knows he has no opportunity to make money off you from financing.
Despite improvements in quality, it stands to reason that preowned cars generally will be less reliable than brand new models. The older the car, the more money you may have to spend on repairs, especially if it is no longer covered by the automaker's warranty.
Finally, apply the 10% rule.
Take your monthly income and divide it by 10. Your total car costs each month should be no higher than that. That includes your car payment, insurance, maintenance, and gas. (Your insurance company should be able to give you an estimate before you buy the car.)