is a 72 month car loan a good idea

Is a 72 Month Car Loan a Good Idea?

Getting a new car is always an exciting experience. However before rushing out to the dealership it’s important to think carefully about how you will finance your vehicle purchase. Many dealerships now offer 72 month (6 year) car loans to help lower the monthly payments. But is taking out such a long auto loan a good idea? In this comprehensive guide, we’ll explore the pros and cons of 72 month car loans to help you make an informed decision.

What is a 72 Month Car Loan?

A 72 month car loan is a 6 year financing agreement to pay for a new or used vehicle. The long repayment term means the monthly payments are lower compared to a 3 or 5 year loan. However, you end up paying more in interest costs over the full duration of the loan.

Pros of 72 Month Car Loans

There are some potential benefits to choosing a 72 month auto loan:

• Lower Monthly Payments: The #1 reason people opt for a 6 year car loan is to lower their monthly payment. By stretching the payments over 6 years instead of 5 years, the monthly cost goes down. This helps buyers afford a more expensive vehicle.

• Buy Now, Pay Later: With smaller monthly payments, 72 month financing enables some buyers to purchase a vehicle they otherwise could not afford. While not ideal, it does allow people to buy a car in the present and worry about the payments later.

• Build Credit: Making consistent and on-time payments over a 6 year term shows lenders you are creditworthy. This can help build your credit score over time, allowing you to qualify for better interest rates in the future.

• Pay Off Other Debts: Some buyers use the lower monthly payment to pay off higher interest credit cards and other more pressing debts first. Once those debts are eliminated, they make extra payments on the car loan.

Cons of 72 Month Car Loans

However, there are also significant drawbacks to using 72 month financing:

• Higher Interest Costs: The interest rate is usually higher the longer the term. You’ll pay thousands more in total interest costs over 6 years compared to a 3 or 5 year loan.

• Upside Down Loan: Due to rapid depreciation, your loan balance can quickly be higher than the car’s value. This puts you in an “upside down” or “underwater” loan position. If you total the car, insurance payouts may not cover the remaining loan balance.

• Loan Outlasts Warranty: Most new car warranties expire within 3-5 years or 60,000 miles. If you still have 2+ years of payments left, you’ll pay out-of-pocket for repairs no longer covered by warranty.

• Negative Equity Risk: If trading in your vehicle before paying it off, negative equity from the 72 month loan can roll over into the new auto loan, increasing payments and interest costs.

• Life Changes: Your financial situation may change over 6 years. Job loss or other factors can make it difficult to continue making payments for the full loan duration.

• Missed Savings Opportunities: Lower monthly payments seem attractive, but that money could be better utilized for retirement, investments, or other long-term goals.

Is a 72 Month Car Loan Right for You?

In general, experts recommend avoiding loans over 60 months. However, here are some instances when it may make sense:

• Excellent Credit: Those with top tier credit scores can qualify for very low interest rates on a 72 month term, minimizing the extra interest paid.

• Plan to Keep Car 10+ Years: If you drive vehicles for long periods, the loan will be paid off before condition becomes an issue.

• Large Down Payment: Putting down 20% or more lowers the amount financed. This results in paying less interest over the loan duration.

• No Prepayment Penalties: Giving yourself flexibility to pay extra each month to pay off the loan early can offset some of the extra interest costs.

• Special Low APR Promotions: 0% or other very low rate promotions can make a 72 month term work, provided you qualify and can pay off most of the balance when the promo period ends.

Tips for Getting the Best 72 Month Loan

If you believe this long term financing option is right for you, here are some tips:

• Shop Around: Compare interest rates and terms from multiple banks and lenders to find the best offer. Avoid just accepting what the dealership offers.

• Consider a Credit Union: Credit unions frequently have the lowest auto loan rates and best approval odds for borrowers.

• Make a Large Down Payment: Put down 20-30% if possible to get the best rates and keep your loan balance low.

• Buy at the End of Model Year: Late summer and end of year sales mean bigger discounts to help offset the extra interest you’ll pay.

• Pay Extra Each Month: Making bi-weekly or additional principal-only payments each month knocks years off the loan and saves substantially on interest.

• Purchase GAP Insurance: This protects against owing money if the car is totaled and insurance payout is less than loan balance.

• Refinance Early: If you can improve your credit score after a couple years, refinancing to a lower rate and shorter term loan can save thousands.

The Bottom Line

A 72 month car loan can be manageable if you get a very low interest rate, keep your loan balance low, and plan to pay it off early. However, due to the disadvantages, it’s generally better to find a way to qualify for 60 months or less when financing a vehicle. Avoid buying more car than you can reasonably afford. While tempting, long term loans often lead to higher costs and negative equity situations in the long run.