Are you following Clark’s maximum auto loan length rule?

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Are you following Clark’s maximum auto loan length rule?
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Lengthy auto loans of 72 months or longer are on the rise, according to a new report from the Consumer Financial Protection Bureau (CFPB).

Unfortunately, money expert Clark Howard says that’s about 30 months longer than any auto loan you should ever take out!

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3 reasons why 72-month auto loans are bad news

Back in 2009 at the height of the Great Recession, 26% of auto loans stretched for terms of six years (72 months) or longer.

But within just the last year, that number has skyrocketed to 42% of all auto financing being for a payback term of six years or more. That’s according to new numbers from the CFPB.

Six-year loans are alluring to a lot of consumers because they let you stretch the length of your loan out to achieve a lower monthly payment. That’s why they’re often used by consumers with low credit scores.

The average credit score for a person with a six-year loan is 674 — a full 39 points below the average for five-year borrowers, the CFPB reports.

Here are some other drawbacks of longer loan terms:

They’re more costly in the long run

You’ll spend thousands more over the life of a six-year loan versus a five-year loan.

Let’s say you finance $20,000 at 5% for five years. After three years, you’ll have paid $2,190.27 in interest and you’re left with a remaining balance of $8,602.98 to pay over 24 months.

But what if you extended that loan term with same interest by 12 months and gotten into a six-year loan?

After those same three years pass, you’ll have paid about $152 more in interest over 36 months, plus you’ll have a remaining balance of $10,747 to tackle over the next 36 months.

So the net effect of selecting a 72-month loan (instead of a 60-month loan) is that you’ll pay some $2,000 more over time, according to CFPB’s calculations!

You’re likely to finance more money

“The average loan amount for a six-year loan was $25,300, compared to $20,100 for a five-year loan,” the CFPB writes. “The average size of loans with terms of seven years or more was even larger at $32,200.”

You’re more likely to default

Borrowers with six-year loans are about twice as likely to default than those with five-year loans.

The CFPB finds six-year borrowers have a more than 8% default rate, while five-year borrowers have a default rate in the neighborhood of 4%.

Clark: 42 months should be your max auto loan

With all this talk of the merits of a five-year loan, you might think that an auto loan payback term of 60 months is ideal — but it’s not!

Consumer expert Clark Howard has long advised people that even shorter is better when it comes to auto loan terms.

“The longest auto loan you should ever take out is 42 months,” Clark says. “If you can’t afford the payment on a 42-month loan, then you should buy a cheaper car.”

Buying a cheaper car may mean having to buy a used car instead of a new vehicle. But you might be surprised how much car you can get for not too much money.

Here’s a look at the best used cars for between $5,000 and $10,000:

Subcompact cars

  • Honda Fit, 2007-2011

Compact cars

  • Pontiac Vibe, 2007-2010
  • Toyota Corolla, 2007-2011
  • Toyota Matrix, 2007-2008, 2010
  • Toyota Prius, 2007-2009

Large and midsized cars

  • Honda Accord, 2007
  • Toyota Camry, 2007-2008

If you have a bigger budget to work with, we’ve got a list detailing 17 of the best used vehicles that you can get for $15,000 or less!

RELATED: How to get out of a bad car loan

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Theo Thimou About the author:
Theo is director of content for clark.com. He has co-written 2 books with Clark Howard, including the #1 New York Times bestseller Clark Howard's Living Large in Lean Times.
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