You’ve put your heart on this hot new sports coupe, but the monthly car loan payments just don’t fit your budget. The salesperson sighs compassionately and then says, “I have an idea how this works.”
He recommends extending the car loan to 72 or 84 months. He explains that your deposit would stay the same, but your monthly payment will be lower. As he speaks, you picture the coupe in your garage and show it to your friends.
But wait a second! Break off the daydreams. Long auto loan terms prepare you for a “vicious cycle of negative equity,” said Oren Weintraub, president of AuthorityAuto.com.
If you’re wondering where you are with your own car loan, check out our car loan calculator at the end of this article. This might even convince you that refinancing your auto loan would be a good idea. But first, here are a few statistics to show you why 72- and 84-month auto loans are robbing you of financial stability and wasting your money.
Alarming statistics on car purchases
Car loans Over 60 months are not the best way to finance a car, because on the one hand they result in higher interest rates on the car loan. Still, according to Experian, 38% of new car buyers took out loans with a maturity of 61 to 72 months in the first quarter of 2019. Even more alarming, Experian data shows that 32% of car buyers take out loans between 73 and 84 months – that’s six to seven years, folks.
“To close the deal, [car dealers] Have to offer a convenient payment, ”says Weintraub. “Instead of lowering the selling price of the car, they are extending the credit.” However, he adds that most traders are unlikely to reveal how this can change the interest rate and create other long-term financial problems for the buyer.
Used car financing follows a similar pattern, with potentially worse results. Experian shows that 42.1% of the Used car buyers take out 61- to 72-month loans, while 20% take even longer and finance between 73 and 84 months.
If you bought a 3 year old car and took out an 84 month loan, it would be 10 years old when the loan was finally paid off. Try to imagine how you would feel if you made loan payments on a dented 10 year old pile.
Long repayment terms are another tool the dealer must put you in a car with as you focus on the monthly payment rather than the total cost. But just because you might qualify for these long loans doesn’t mean you should get them out.
5 reasons to turn down long loans
1. You are immediately “under water”. Underwater or upside down means you owe the lender more than the car is worth.
“Ideally, consumers should get the shortest car loan they can afford,” said Jesse Toprak, CEO of CarHub.com. “The shorter the loan period, the faster the equity capital builds up in your car.”
If you have equity in your car, you can always trade it in or sell it and pocket some money.
2. It prepares you for a negative stock cycle. For example, let’s say you need to trade in the car before paying off a 72 month loan. For example, even after the trade-in value has been credited to you, you may still owe $ 4,000.
“A dealer will find a way to bury these four giants with the next loan,” says Weintraub. “And then the money could even flow into the next loan.” Each time the loan gets bigger and your debt increases.
3. Interest rates jump over 60 months. According to Edmunds analyst Jeremy Acevedo, consumers pay higher interest rates when they extend the loan term beyond 60 months.
Additionally, Edmund’s data shows that when consumers agree to a longer loan, they appear to choose to borrow more, suggesting they are buying a more expensive car, including extras like warranties or other products, or simply more pay for the same car.
For loans with maturities of 61 to 66 months, the average loan amount was $ 29,591 and the interest rate was 4.1% for a monthly payment of $ 512. But when a car buyer agrees to extend the loan to 67 to 72 months, the average loan amount was $ 33,238 and the interest rate jumped to 6.6%. This gave the buyer a monthly payment of $ 556.
4. You will shell out for repairs and loan payments. A 6 or 7 year old car probably has more than 75,000 miles on it. A car this old definitely needs tires, brakes, and other expensive maintenance – not to mention unexpected repairs.
Can you meet the Experian average loan payment of $ 550 and pay for the maintenance of the car? If you bought an extended warranty, it would add even more to the monthly payment.
5. Look at the additional interest you will be paying.
Interest is money that goes down the drain. It’s not even tax deductible. So take a good look at what it will cost you to extend the loan. Inserting Edmunds’ averages into a Car loan calculator, a person who finances the $ 27,615 car at 2.8% for 60 months pays a total of $ 2,010 in interest. The person who moves up to a $ 30,001 car and finances it at an average rate of 6.4% for 72 months pays three times the interest, a whopping $ 6,207.
So what should a car buyer do? There are ways to get the car you want and finance it responsibly.
4 strategies to turn the tables
1. Use low APR loans to increase cash flow for investments. CarHub’s Toprak says you can only get a long loan if you can get it at a very low APR. For example, Toyota has offered 72-month loans at 0.9% for some models. So instead of tying up your money by making a large down payment on a 60 month loan and making heavy monthly payments, use the money freed up for investments that could generate a higher return.
2. Refinance your bad loan. When your emotions get the better of you and you sign a 72-month loan for this sports coupe, all is not lost. Provided your credit rating is good, you possibly can refinance your car loan at better conditions with no prepayment penalties or fees.
3. Make a large down payment to pay off the depreciation upfront. If you decide to take out a long loan, you can avoid standing underwater by paying a large down payment. If you do that, you can trade out of the car without having to roll negative equity into the next loan.
4. Rent instead of buy. If you really want this sports coupe and can’t afford to buy it, you probably can Leasing for less money in advance and lower monthly payments. An option that Weintraub occasionally suggests to its customers, especially since there are great leasing offers, he says. If you still want the car at the end of the lease, you have the right to buy it for an amount specified in the contract, known as the “residual value”.
Now that you understand the damage of long loan terms and the unnecessary cost of high interest rates, take a moment to look at your car loan. Use our car loan calculator to find out how much you still owe and how much you can save by refinancing.