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You may ask “why should I be concerned about signing a 60 or 72 month car loan if I can afford the payment?” The answer, in a word, is “depreciation.”

Cars and trucks are depreciating assets. That is,  they go down in value with each day and each mile of wear and tear. When you get a 5 year or longer loan, you won’t be break even  on your loan for at least 3 years. All your payments through at least year 3 (and most likely longer) will be applied to interest only. My experience has been that people with long term car loans often have less than perfect credit and their interest rates are 7%, 8% or even higher.

That means that if your car breaks down, or if you want to replace your car or truck 3 or 4 years into the loan, you will have to come out of pocket to satisfy the loan. If your car is totaled in a wreck before the break even point, you will have to come out of pocket to pay off the loan because insurance companies pay property damage settlement based on “low retail” value.

If the dealership offers to “roll your existing payment” into a new loan, you’ll end up paying even more, because the new loan will include the leftover finance costs from the original loan plus the terms from the new loan.

A 5 year or longer car loan equals a long term rental, except that you bear all the risk of loss. In case I am not being clear, a 5 year or longer loan is a toxic loan, and almost never a good idea. Even 4 year loans are less than ideal.

How Can You Escape from Long Term Vehicle Loans

So, what can you do if you are stuck in a long term vehicle loan? Some credit unions will consider a refinance that would allow you to reduce the term down to 3 years but that assumes (a) you can handle a higher payment and (b) that your credit score has improved to allow for a lower interest rate.

Another option to consider is Chapter 13 bankruptcy. Chapter 13 gives you the right to  “cram down”  for  car and truck loans. If you took your loan out more than 2 ½ years ago (910 days), we can reduce your loan balance to the value of your vehicle. We may also be able to reduce that high interest rate to a rate closer to the prime rate (which is currently around 1.5%).

  • Here’s an example: Tom owns a car worth $15,000, that he bought 3 years ago with a 72 month loan at 8% interest. The current balance is $21,093 and the monthly payment is $440. In Chapter 13, we can cram down the $21,093 balance to $15,000 and reduce the interest rate to 4.5%. Tom will end up paying around $235 per month to the lender within his Chapter 13.

Every case will be different, but if you have a long term car loan at a high interest rate that you signed more than 2 ½ years ago, Chapter 13 can most likely save you thousands of dollars.