Why That Long-Term Car Loan Could Be Costly

There were 17.4 million car sales last year, the most sales since the financial crisis, according to the U.S. Bureau of Economic Analysis. Alas, also on the rise is a financially questionable way to pay for the big-ticket purchase.

More than seven in 10 new cars purchased with a loan last year had a term of more than 60 months, according to Experian Automotive. While five-year loans have long been the most common, car loans lasting six to seven years have grown from 11 percent of the loan market in 2008 to 29 percent last year. The average car loan is now 67 months long. That's a far cry from how your grandfather financed his Buick; in the early 1970s, car loans averaged less than 36 months.

But long-term car loans aren't necessarily better. “If you are considering a new car loan beyond five years, it's a signal you are buying a car that is too expensive,” says Greg McBride, senior financial analyst at Bankrate. “People make the mistake of shopping based on what the monthly cost will be, rather than focusing on the total they will pay.”

Today, car loans for new cars average around $30,000. A 60-month loan that charges 3 percent interest works out to a monthly tab of $539, and total interest charges over the five years will come to $2,344. That same loan extended to 72 months—at the same 3 percent rate—results in a more palatable monthly cost of $456, but total interest costs rise to $2,818.

However, many lenders typically charge a higher interest rate on long-term car loans. For example, Chase bank recently advertised new car loans that charge a 2.6 percent rate for a 60-month loan, but 3.4 percent for a 72-month loan. On a $30,000 loan that increases your total interest payments from $2,025 to $3,206.