More new-car shoppers are opting for seven-year loans, reflecting the increasing cost of financing a vehicle.
Seven-year loans accounted for 19.8% of all new vehicle financing by dealers in the first quarter of 2025, a new high reported by Edmunds.
The average new-car customer borrowed $41,473 in the first three months of 2025 at an annual interest rate of 7.1%, resulting in a monthly payment of $741. These terms added $9,231 in interest to the total cost of the average car.
Car loans have been extending in duration as buyers struggle to keep up with rising prices, offering as many financing options as home buyers.
However, cars depreciate in value, unlike homes that tend to appreciate.
"It's not money that you get back. It's not equity that you have in the car," said Brian Moody, executive editor of Kelley Blue Book and Autotrader.
One concerning trend is that many cars depreciate faster than the loan repayment, leading to being "underwater" on the loan. The longer the loan, the higher the risk of being in this predicament.
Years ago, a common car-buying rule advised a 20% downpayment, a four-year loan term, and spending no more than 10% of monthly income on transportation.
In the early 2000s, a five-year loan was typical, but now, a six or seven-year loan has become more common. Today, only 10% of new car buyers opt for loans of four years or less.
The average new car cost $47,462 in March 2025, compared to $38,162 in March 2020, with interest rates also rising significantly.
Consumers often choose longer loan terms for lower monthly payments, although this can lead to higher total interest costs.
Longer loans and higher rates are increasing the number of customers with negative equity.
Before committing to a seven-year car loan, consider the impact of monthly payments on your budget, especially in conjunction with other expenses.
Putting down a larger downpayment can help reduce the need for a longer-term loan and lower the risk of negative equity.
Ultimately, the decision to opt for a longer loan term should align with your financial goals and vehicle ownership plans.