File under: Personal Finance for Everyone.

I read a disturbing article during the past week.  Reuters and WSJ reported that the average length of a new car loan is now 65 months(!).

Many personal finance experts like Clark Howard state that you should not go past 40 months on the length of a new car loan.  Why?  For longer loans, you’re what’s known as ‘upside down’ on your loan- You owe much more on the loan than your car is worth.

In spite of this, banks are now writing 7 and 8 year car loans.  Evidently, most people like to think in terms of monthly payments- Preferably less than $500 a month for a car payment.  Stretching the loan term out to 5, 6, and 7+ years somehow looks like a good deal to some folks, as the monthly payment allows you to purchase more car for the same monthly payment.  If you think along these lines, the auto industry refers to you behind your back as a ‘Payment Buyer’.

I’m going to prove to you a 65-month car loan is a bad idea, even after I make the following heroic assumptions in your defense:

  • Even though you think it’s a good idea to take on a 65-month car loan, I’ll still assume you somehow have a credit score over 700.
  • With your decent credit score, you can get a 65-month loan from for 1.74%.
  • You’re buying a car that costs less than the national average of $31,000 for a new car.
  • You’ve chosen a practical vehicle, the Honda Accord LX- for $25,000.  This is a historically reliable vehicle that holds its value exceptionally well (it loses its value very slowly).

Have a view at the payment vs. depreciation graph below (depreciation values from

Carl Loan versus Depreciation

You’re ‘Upside Down’ your Honda Accord for the better part of the first 2 years!  This means that if a manure truck slams in to your parked car on the street, your insurance check will come up short.  You still owe the bank the difference between the value of your car and your loan balance, just to cover the debt you still owe the bank for the privilege of not driving your now-destroyed car.

When you’re Upside Down, your auto insurer may require you to purchase what is called ‘Gap Insurance’, which covers the difference between what you still owe on your loan and what your car is worth.  Think of it as PMI insurance for your car (a bad idea).

In summary, don’t be a Dime Store Sucker  ‘Payment Buyer’- Choose a less expensive vehicle and a shorter loan.  Or better yet, let someone else pay the depreciation costs on a new car and purchase yourself a late-model used car.

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3 thoughts on “Do you want Private Mortgage Insurance with that Car Loan?

  1. “even after I make the following heroic assumptions in your defense”
    How could I not keep reading after that?
    I think I might stretch out the payments on my new truck to 48 months, but the loan is only 50% of the purchase price. What will probably happen though is I’ll get sick of the monthly payment and pay it off early.
    I’m not one of those “OMG you must pay cash for a car! OMG it’s a depreciating asset!” I like the flexibility and leverage you get with a low-interest, secured loan.

    • Rob-
      We’ve taken a car loan in the last few years, but we put down about $10k on a 36 month loan at 0.9 percent. This, of course, was after negotiating the price through Costco and pre-qualifying for a loan through NFCU.


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