The Pros and Cons of Long-Term Auto Financing (2024)

Whether it’s an SUV for a growing family, a powerful work truck or a sleek EV, when it comes to purchasing a new vehicle, buyers tend to know what they’re looking for. But beyond curiosity on safety features or fuel efficiency, one question often seems to be the tiebreaker: How much will the payment be?

For a variety of reasons, many buyers are exploring long-term auto financing to reduce the cost of their monthly payments. Is this an option for you?

What is long-term auto financing?

For years, auto financing contracts were written with monthly payments typically distributed over a four-year time frame. Now, consumers can stretch payments over five, six and seven years. There are even specialized options where contract terms are written for 96 months, totaling eight years of payments.

Obviously, making payments over these extended time frames can lower monthly payments. Which, on the surface, sounds great. But consumers should consider other factors as well because a small monthly payment may come with additional unexpected expenses.

An increase in popularity

Long-term financing has become more popular, and there are several reasons why.

Though the average price of a vehicle has slightly declined, it’s still considered relatively high at just over $48,000. With a price point like this, today’s higher interest rates and several years of auto supply chain issues, it’s easy to see why more consumers are exploring this option.

Another factor? Average car payments have also increased, making long-term financing more appealing to some. In the first quarter of 2023 for example, the average new vehicle payment was $725. This is a significant increase of 11.5% from the previous year.

Pros of long-term auto financing

Beyond minimized payments, consumers can reap other benefits of long-term auto financing.

• Lower down payment – For those who would rather not pay a larger down payment, but have no problem making a monthly payment, purchasing a vehicle with long-term financing could mean a lower down payment requirement.
• Larger loan amounts – A consumer with a smaller vehicle budget may find long-term auto financing as an avenue to getting a more expensive vehicle. Since payments are made over a longer period of time, finance companies may approve a higher financing amount, equaling more buying power.
• Higher value vehicle – Because monthly payments are made over a longer time frame, consumers may be able to upgrade their vehicle purchase to include added features and trim levels, for example.

Cons of long-term auto financing

Long-term financing has its benefits, but there are other financial implications to be aware of before entering into a long-term agreement.

• Vehicle depreciation– This is the rate at which a vehicle loses value over time. New car values depreciate around 20% in the first year of ownership (and steadily decline after that). The longer you finance your vehicle, the more value it loses. This can lead to negative equity.
• Negative equity – Sometimes referred to as being “upside down” on a vehicle, negative equity happens when more is owed on a vehicle than its worth. With long-term financing, if a buyer ever needs a different vehicle before the end of the contract, any negative equity could impact the purchase and financing of a second vehicle.
• Higher interest – Vehicles purchased with long-term financing typically come with lower monthly payments but possibly a higher interest rate. Auto finance companies set interest rates based on the level of risk and consider long-term loans riskier than others. And a higher interest rate means that you will pay much more for a vehicle over the life of the retail contract.

Is long-term auto financing best for me?

Buying a car should be an informed decision. Understanding the factors that could impact your payment is one of the best ways to be prepared and make for a smoother process.

Your budget, credit rating, vehicle type and income should all weigh into your decision to explore long-term financing. Ultimately, it comes down to deciding whether having a smaller payment outweighs any additional finance costs over the years. The great part is there is no wrong or right answer. Simply do what’s best for you.

KEYS® by GM Financial provides a free Car Buying Course to help guide you when it’s time. You can also use the Payment Calculator to estimate your monthly payments.