72 Month Car Loan and Negative Car Equity

For potential buyers looking at a 72 month car loan, it's important to consider the potential drawbacks of this long-term loan, including something that affects many buyers: negative equity.

Negative equity occurs when the value of a vehicle is less than what is owed on the vehicle. Negative equity is especially common for long-term loans like a 72-month car loan, and for anyone thinking about taking on one of these long-term loans, some basic issues must be considered to avoid extensive financial liability.

Drivers who erroneously think that the lender or the dealer will take care of negative equity at trade-in should think again. In reality, dealers generally roll any negative balance into the financing of your next vehicle. In other words, if you owe more than the car is worth when you trade it in, you will probably see that balance attached to the terms of your new loan.

One problem that leads to negative equity is what some might call passive borrowing. Borrowers sometimes accept an offer for financing from a dealer without thinking the situation through.

Some deals include one year at 0%, which is great, but 0% financing is not a good deal unless the APR for successive years is at least moderately low. Otherwise, borrowers are just putting off payment until the future, when snowballing interest often causes huge negative equity situations.

One way that borrowers can improve their negative equity situation is to value upfront payment over delayed payment. One way to do this is by opting for a dealer rebate instead of a low introductory interest rate. Choosing the low introductory interest rate leaves the loan value high, and again, just delays payment. Taking the rebate, on the other hand, will automatically reduce a driver's debt, and that will help a lot down the road to avoid negative equity.

Other options include looking into early payment possibilities. Some auto loans come with prepayment penalties, while other loans allow for prepayment, and less buildup of interest.

One of the main ways to avoid negative equity is simply to shorten the term of a loan so that the interest does not have as much time to build up. That's the reason why many experts counsel against 72-month car loans when advising buyers.