When it comes to purchasing a used car, many of us consider financing options. The ability to spread out payments over time can make buying a car more manageable, especially if you’re not in a position to pay the full amount upfront. One of the most common financing terms that buyers encounter is the 72-month loan term. But is a 72-month financing plan the best choice for everyone? In this article, I will dive deep into the pros and cons of 72-month financing, explain how it works, and provide examples and calculations to help you understand whether it’s a good fit for your situation.
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What is 72-Month Financing?
When you finance a car, you borrow money from a lender to pay for the vehicle. The loan is then paid back over a set period, known as the loan term. A 72-month loan term simply means you will pay back the loan over 72 months, which is equivalent to six years.
Why Choose 72-Month Financing?
If you’ve been shopping around for a used car, you might have noticed that some dealerships or lenders offer financing options that stretch over 72 months. While shorter loan terms, such as 36 or 48 months, are also available, a 72-month term might seem attractive because it lowers your monthly payment. Let’s break down why you might consider this option.
Lower Monthly Payments
The main appeal of a 72-month loan term is the reduction in monthly payments. By extending the term, the lender can spread the total cost of the car over a longer period, which lowers the amount you owe each month.
For example, let’s assume you’re purchasing a used car for $20,000 with a 5% interest rate. Here’s a breakdown of the monthly payments based on different loan terms:
| Loan Term | Monthly Payment | Total Interest Paid | Total Loan Paid |
|---|---|---|---|
| 36 months | $599.18 | $1,567.48 | $21,567.48 |
| 48 months | $460.27 | $2,269.96 | $22,269.96 |
| 72 months | $336.44 | $3,103.64 | $23,103.64 |
As you can see, the monthly payment is significantly lower for the 72-month term. In this case, it’s reduced by more than $250 when compared to the 36-month loan.
Affordability
With a lower monthly payment, a 72-month term may make a car more affordable. You might be able to afford a higher-priced car that you couldn’t otherwise fit into your budget with a shorter loan term. If you’re considering purchasing a used car that’s just slightly out of your price range, the 72-month term might allow you to make it work.
Availability of 72-Month Financing
Many lenders and dealerships offer financing terms as long as 72 months, especially for used cars. This can give you more flexibility when choosing your car. However, it’s important to note that not all used cars qualify for 72-month financing. Lenders may have restrictions, especially for older vehicles.
The Downsides of 72-Month Financing
While the allure of lower monthly payments can be tempting, there are several drawbacks to a 72-month loan that you need to be aware of.
Higher Total Interest Costs
One of the most significant downsides of choosing a longer loan term is that you will end up paying more in interest. By stretching the loan term to 72 months, you are paying interest over a longer period, which increases the overall amount of money you will pay for the car.
In the example above, a 72-month loan results in paying an additional $1,536.16 in interest compared to a 36-month loan. If you take out a larger loan, that difference can become even more significant. Essentially, while your monthly payment is lower, the total cost of the car is higher.
Negative Equity Risk
Another issue with long-term financing is that you could end up owing more on the car than it’s worth, especially in the first few years of the loan. This is known as being “underwater” or having “negative equity.” Because the car’s value depreciates quickly, you might find that you owe more than the vehicle is worth if you need to sell or trade it in before the loan is paid off.
For example, if you purchase a car for $20,000 and the car’s value drops by 15% in the first year, you might only be able to sell it for $17,000. However, after making just one or two years of payments on your 72-month loan, you could still owe more than $17,000. This can be problematic if your financial situation changes and you need to get rid of the car.
Longer Commitment
A 72-month loan is a long commitment. For six years, you are tied to this car and the monthly payments. If your financial situation changes, you might feel trapped by the loan. For example, if you lose your job or need to make other large financial commitments, the long-term loan could become an obstacle.
Potential for Higher Interest Rates
Some lenders offer lower interest rates for shorter loan terms because the risk of the loan is lower for them. In contrast, longer-term loans might come with higher interest rates, especially if you are financing a used car. This could make your loan more expensive in the long run.
When Does 72-Month Financing Make Sense?
While 72-month financing has some significant drawbacks, it can still be a good option in certain situations. Here are a few scenarios where a 72-month loan term might make sense for you:
1. You Need Lower Monthly Payments
If you’re on a tight budget and need to keep your monthly payments low, a 72-month loan might be your best option. It allows you to afford a higher-priced car or stay within your budget without stretching yourself too thin.
2. You Can Afford the Total Interest Cost
If you’re financially comfortable with the idea of paying more in interest, a 72-month term could be worth it. You’ll need to be okay with the higher overall cost of the car, but if that’s acceptable to you, the lower monthly payment might be appealing.
3. The Car Is Relatively New and Retains Its Value Well
If you’re buying a used car that is only a few years old and has a strong resale value, the risk of negative equity might be lower. Cars with good resale values might still be worth a significant amount even after several years, reducing the chances of owing more than the car is worth.
When to Avoid 72-Month Financing
If any of the following apply to you, it might be better to avoid 72-month financing:
1. You Plan to Sell or Trade the Car Before the Loan Is Paid Off
If you think you might want to sell or trade the car in a few years, the 72-month loan could put you in a difficult position. The risk of being upside down on the loan increases with longer loan terms, and you could end up owing more than the car is worth when it’s time to trade it in.
2. You Want to Save Money on Interest
If your goal is to save as much money as possible, a shorter loan term might be better. A 36-month loan term will result in significantly less interest paid, even though your monthly payment will be higher. This could be a better choice if you want to keep the overall cost of the car down.
3. You Want Flexibility
If you want the flexibility to move on from the car in a few years, a 72-month loan may not be ideal. A shorter loan term, such as 36 or 48 months, will give you the freedom to own the car outright sooner, providing you with more options in the future.
How to Make the Right Choice for You
If you’re debating between a 72-month loan term and a shorter option, I recommend evaluating your financial situation carefully. Think about your monthly budget, how much you’re willing to pay in interest, and how long you plan to keep the car. A 72-month loan might be the right choice for some buyers, but it’s essential to understand the trade-offs before making a decision.
Start by calculating your monthly payment for different loan terms. You can use online loan calculators or ask the dealership for an estimate. Then, consider the total amount you’ll pay over the life of the loan. Will the savings on monthly payments be worth the higher interest costs? Will you be able to manage the total loan payment comfortably?
In the end, only you can decide what works best for your budget and lifestyle. I hope this guide has helped you understand the pros and cons of 72-month financing on used cars. Take your time, do the math, and make the choice that aligns with your financial goals.
