Car loan terms: why 84 months costs more for the same car
A longer loan lowers the payment and raises the total. The Government of Canada's own example puts the gap at $2,707.
At the dealership, the conversation is usually about the monthly payment. The number that tells you what the car really costs is a different one: the total you'll pay, interest included. Stretching the loan makes the first number smaller and the second one bigger.
The Government of Canada's example
The Financial Consumer Agency of Canada (FCAC) uses a $25,000 car loan at 5% to show what the term does. Same car, same rate, two lengths:
| Term | Monthly payment* | Total interest | Cost of the car with interest |
|---|---|---|---|
| 36 months (3 years) | about $749 | $1,974 | $26,974 |
| 84 months (7 years) | about $353 | $4,681 | $29,681 |
| Difference | about $396 less a month | $2,707 more | $2,707 more |
*The FCAC publishes the interest and total cost. The monthly payments are Carnet's calculation with the standard loan formula, payment = P × i ÷ (1 − (1 + i)−n), where P = $25,000, i = 5% ÷ 12 and n = the number of months. Our math gives $749.27 and $353.35 a month, and total interest of $1,973.81 and $4,681.21, which matches the FCAC's $1,974 and $4,681 once rounded.
The longer loan more than doubles the interest: $4,681 is about 2.4 times $1,974. The 5% rate is the FCAC's illustration, not a current market rate. At a higher rate the gap gets wider.
What "long-term" means
The FCAC calls a car loan long-term at 72 months (6 years) or more. Long terms make a bigger car fit a monthly budget. The trade-off is more interest, plus more years in which the car can be worth less than you owe on it.
Negative equity: owing more than the car is worth
Cars lose value fast. According to the FCAC, a new car may be worth 25% less after one year and typically loses 15% to 25% of its value in each of the next four years. When the loan balance falls more slowly than the car's value, you have negative equity.
The FCAC's example: a $31,300 car with $3,700 in taxes and fees, financed with a $35,000 loan at 4% over 8 years, at about $425 a month. After two years the car is worth about $18,780 and the loan balance is about $27,300. The gap is $8,520. That matters if you need to sell, if the car is written off and the insurance payout doesn't cover the loan, or if you trade it in and roll the shortfall into the next loan.
Questions to ask before you sign
- What is the total cost with interest for each term you're offered? Ask for them side by side.
- What is the interest rate for each term? A longer term doesn't always come with the same rate.
- What is the total price of the car, including taxes and fees, before financing?
- Can you pay the loan off early, and is there a charge for doing so?
The FCAC's own tips: buy a car that fits your budget, choose the shortest term you can afford, put money down if you can, compare new and used, and avoid trading in a car while you have negative equity.
- Compare total cost with interest, not monthly payments.
- Get every term offered in writing, side by side.
- Know the car's all-in price before talking financing.
- Check the early-repayment terms.
Noted.
Sources
Figures in this note were checked against these sources on the date shown above.
This note is general education, not personal financial, tax or legal advice. Rules and figures change; confirm with the source and, where needed, a qualified professional. Terms are defined in the glossary.
