Why a 100-month auto loan might be a bad idea, according to experts

‘Eight years and four months of debt in exchange for something that you will likely lose 20% of value on before you get to change the oil for the second time is just madness,’ one expert said

Is the car of your dreams worth an auto loan of 100 months or more?

That’s a question that many consumers are likely asking themselves as the cost of new and used cars and trucks continues to climb. Auto loans of 100 months or more are starting to pop up on lender websites – LOC Credit Union and Americo Federal Credit Union are examples – promising lower monthly payments for budget-conscious buyers.

While the prospect of an affordable monthly payment may be attractive, the long-term commitment a 100-month car loan requires likely isn’t worth the trade-off, said Eric Croak, president of Ohio-based financial firm Croak Capital.

“I don’t think it’s necessary to sugarcoat,” Croak told The Independent. “Eight years and four months of debt in exchange for something that you will likely lose 20% of value on before you get to change the oil for the second time is just madness.”

A car’s depreciation – the rate at which it loses value over time – is just one of several reasons why it may not make sense to get a 100-month auto loan for a new car.

Some consumers are turning to 100-month auto loans to finance new cars (Getty Images)

Interest costs are high

In general, long-term loans come with a trade-off. The longer the repayment term, the lower your monthly payments will be, but the more you pay in interest over the life of the loan.

Additionally, lenders tend to charge higher interest rates for longer loans because a longer repayment period exposes the lender to a higher chance that you might default on your payments.

A 100-month auto loan exaggerates the benefits and costs, especially when you compare it to shorter repayment terms of four, five, and six years. Here’s what the interest rate, monthly payment, and total interest paid would look like for a $50,000 loan (around the average cost of a new car, according to Kelley Blue Book) for a borrower with good credit:

Repayment term	Interest rate*	Monthly payment	Interest paid	Total cost
48 months	5.89%	$1,171.73	$6,243.11	$56,243.11
60 months	6.29%	$973.40	$8,403.80	$58,403.80
72 months	6.59%	$842.64	$10,670.13	$60,670.13
84 months	8.49%	$791.57	$16,492.12	$66,492.12
100 months	9.39%	$722.74	$22,273.85	$72,273.85

*Based on the lowest available Navy Federal Credit Union auto loan rates per repayment term for borrowers with excellent credit, plus an additional two percentage points to account for a borrower with good credit instead of excellent credit

In the example above, a 100-month loan’s monthly payment would be around $450 lower than a 48-month loan, but you’d pay around $16,000 more in interest over the life of the loan. From a financial perspective, California-based Auto Law Firm CEO Michael A. Klitzke told The Independent by email that a 100-month loan just doesn’t make sense.

“While lower monthly payments may sound attractive, [what] consumers frequently miss is the substantial increase in the total cost to purchase,” Klitzke said. “At 100 months, the total cost is likely to be more than double the price of the vehicle… the consumer just pays a lot more money in the end to purchase the same vehicle. The longer the loan, the more you pay in interest.”

Being ‘underwater’ is more likely

A 100-month loan on a $50,000 new car would cost $22,273.85 in interest if you made no additional payments. Such a high loan amount makes it more likely that you’ll be what’s known as “underwater”: You owe more on your car loan than your car is actually worth.

So, if you get into a wreck and your car is totaled, having a loan balance higher than your car’s value means you’ll have to continue making payments until your loan is paid off. That’s not a good financial situation to be in, said David Johnson, CEO of lending servicer Vervent.

“Lower monthly payments come at the cost of paying interest for years longer, and you typically stay ‘underwater’ (owing more than the car is worth) for a meaningful portion of the loan,” Johnson said in an email to The Independent. “That increases risk if life happens – job loss, accident, major repair, or the need to sell/trade before the loan catches up.”

‘Lower monthly payments come at the cost of paying interest for years longer,’ one expert said (PA Archive)

Alternatives to a 100-month loan

If the low monthly payments of a 100-month loan fit into your budget better than an auto loan with a shorter repayment term, then you aren’t left with many options, said Ashley Morgan, attorney and owner at Virginia-based Ashley F. Morgan Law.

“Unfortunately, when someone [thinks] a 100-month loan is their only option, you typically need to either have more income or buy a cheaper car,” she said.

Buyers can corner themselves, financially speaking, if they’re intent on buying a certain car.

“If you are trying to afford one specific car or trying to purchase a vehicle at a certain price point, then you are locked into to making that amount of money fit into your budget,” Morgan said.

However, if you can find a cheaper car that works for you and produce a down payment, you might get a shorter loan – say 60 months instead of 100 months – with monthly payments that fit in your budget.

“Consider a shorter-term path: A modest car now with a 48-72 month loan can be a bridge to a better purchase later, rather than locking in a decade of payments today,” Johnson said.