A longer term makes the payment fit; the interest and the years of negative equity are what it costs.
On a $37,000 car loan, stretching the term from 48 to 72 months cuts the payment by $237.37 a month but adds $4,132 of interest, 75.9 per cent more, at illustrative rates of 6.9 and 7.9 per cent. The bigger cost is time underwater: with nothing down, the 72-month borrower owes more than the car is worth for 37 months, against 13 on the 48-month loan.
Worked in full in Personal Finance for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Dealers sell cars on the monthly payment because it is the number buyers budget around. The term is the lever that makes almost any car fit the budget, and it is worth knowing exactly what that lever costs before you pull it.
| Input | Value |
|---|---|
| Price of the car | $35,000 |
| Deposit | $0 |
| Taxes and fees added to the loan | $2,000 |
| Amount financed | $37,000 |
| APR, 48 months | 6.9% |
| APR, 72 months | 7.9% |
| Depreciation, first year / each later year | 20% / 15% |
The longer loan carries a higher rate in this example because lenders often price longer terms higher: the car loses value faster than a long loan is repaid, so the lender's security is thinner. Check the rates you are actually offered; the method does not change.
Payment = loan × r ÷ (1 − (1 + r)−n), with r the monthly rate and n the months.
48 months: r = 6.9% ÷ 12; payment = $884.30
72 months: r = 7.9% ÷ 12; payment = $646.92
Excel: =PMT(6.9%/12,48,-37000) and =PMT(7.9%/12,72,-37000)
48 × 884.30 = $42,446.18 repaid, so $5,446.18 of interest.
72 × 646.92 = $46,578.58 repaid, so $9,578.58 of interest.
Difference: $4,132.40.
Of that $4,132.40, $2,844.56 comes from the longer term alone: at the same 6.9 per cent, 72 months would cost $8,290.74 of interest. The other $1,287.84 is the higher rate charged for the longer term. Both effects push the same way.
The 72-month loan frees $237.37 a month for four years. It then asks for $646.92 a month for two more years, after the 48-month borrower has stopped paying: 24 payments, $15,526 in all. The monthly saving is not a saving. It is a loan within the loan, repaid with interest.
The second cost is less visible. A loan with no deposit and the fees rolled in starts above the car's value, and a car loses value fastest in its first years. Equity is the car's value less the balance still owed.
| Month | Car value | Owed, 48 months | Equity | Owed, 72 months | Equity |
|---|---|---|---|---|---|
| 12 | 28,000 | 28,682 | −682 | 31,981 | −3,981 |
| 24 | 23,800 | 19,771 | 4,029 | 26,550 | −2,750 |
| 36 | 20,230 | 10,225 | 10,005 | 20,675 | −445 |
| 48 | 17,195 | 0 | 17,195 | 14,318 | 2,877 |
| 60 | 14,616 | 0 | 14,616 | 7,441 | 7,175 |
The 48-month borrower is underwater for the first 13 months, by at most $1,973 at the start. The 72-month borrower is underwater for 37 months, more than three years, and the gap peaks at $3,981 after a year. If the car is written off, stolen or has to be sold in that window, the borrower pays the difference out of savings or rolls it into the next loan. Rolling it over is how negative equity compounds from one car to the next.
A better test of affordability. Ask what the 72-month payment would buy over 48 months. At 6.9 per cent, $646.92 a month for 48 months repays a loan of $27,068, about $9,932 less than the $37,000 financed in this example. If the shorter loan does not fit the budget, the car is the variable to change, not the term.
| Term, months | APR | Payment | Total interest | Interest per $1,000 |
|---|---|---|---|---|
| 36 | 6.5% | 1,134.01 | 3,824 | 103.36 |
| 48 | 6.9% | 884.30 | 5,446 | 147.19 |
| 60 | 7.4% | 739.65 | 7,379 | 199.43 |
| 72 | 7.9% | 646.92 | 9,579 | 258.88 |
| 84 | 8.4% | 584.09 | 12,064 | 326.04 |
Each extra year saves less on the payment and costs more in interest. Going from 72 to 84 months saves $62.83 a month and adds $2,485 of interest: the term has stopped buying affordability and is only buying time.
There is one honest case for the longer loan: a borrower who takes 72 months for flexibility but pays the 48-month amount every month anyway. Many car loans allow overpayments without a fee, but some do not, so check the agreement. Paying $884.30 a month on the 72-month loan clears it in 50 months, almost two years early, and keeps the lower contractual payment as a safety net if income drops. The higher 7.9 per cent rate still applies throughout, so this costs more than the 48-month loan; it buys the option, not a saving.
Pick the shortest term whose payment fits the budget, and if none fits, pick a cheaper car. Here the longer loan costs $4,132 more and keeps the borrower underwater for three years instead of one. The payment arithmetic is in how a loan's monthly payment is calculated, and the free workbook on getting out of debt is on the Personal Finance for Beginners companion page.
It is expensive rather than forbidden. On $37,000 at illustrative rates it costs $4,132 more interest than a 48-month loan and leaves the borrower owing more than the car is worth for 37 months. If only the 72-month payment fits, the cheaper fix is usually a cheaper car: the same $646.92 over 48 months repays a $27,068 loan.
Multiply the payment by 72 and subtract the amount financed. A $37,000 loan at an illustrative 7.9 per cent costs $646.92 a month, $46,578.58 in all, so $9,578.58 of interest, or $258.88 for every $1,000 borrowed. The same loan over 48 months at 6.9 per cent costs $147.19 per $1,000.
It depends on the deposit and how fast the car loses value. With nothing down, $2,000 of fees in the loan and a car losing 20 per cent in year one and 15 per cent a year after, the 72-month loan is underwater for 37 months and peaks at $3,981 after a year. The 48-month loan is underwater for 13 months.
This article is one calculation from Personal Finance for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: personal finance and investing for beginners → · All 1501 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.