Long-Term Loans: Would You Spend Eight Years Paying Off a Car?

Dec 09, 2014 03:10 PM EST | Jordan Ecarma

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You'd better be really, really sure you like that car if you're thinking about taking on a long-term auto loan.

With some terms lasting as much as 96 months, auto loans are longer than they've ever been, with the average loan hitting a record of 66 months, or five and a half years, Cars.com reported. Around 41 percent of loans in the second quarter of 2014 lasted five to six years, while about 25 percent had terms as long as seven years.

For the first quarter of this year, 24.9 percent of all new-car loans were 73 to 84 months long, according to Experian Automotive data. Long-term credit was a factor in boosted new-car sales this year.

The Truth about Cars blog reported this week that long-term auto loans have since seen "explosive" growth, with loans lasting 73 to 84 months becoming increasingly common in the third quarter of 2014. New-car loans with terms lasting six or seven years saw 23.7 percent growth year over year for the same period.

While some say longer loans make sense since cars are increasingly built better, consumers could get trapped in a debt cycle where they are constantly paying off a new vehicle because of how many years it takes.

"The average person gets tired of their car at around six years," Ron Montoya, consumer advice editor for Edmunds, told the New York Times in November. "The idea is to actually own it and have zero payments at some point."

Cars with staggeringly long loan terms can also have "upside-down" value, which is when a vehicle isn't worth more than what you owe on it, according to Consumer Reports. If you want to trade in or sell the car, the available price won't cover what you still owe.

The vehicle is additionally at risk because if it's stolen or destroyed, the insurance coverage will be insufficient to pay off the rest of the loan.

Consumer Reports recommends keeping the loan time as brief as you possibly can, noting that a three-year loan (or half the average new-vehicle loan term) lets you build thousands of dollars of equity by the end of your first year driving the car.

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