Expert: Long Car Loan Terms Make You Owe More
A car loan term extending up to eight years or 96 months can bring you under water on your loan, an expert told Wall Street Journal’s MarketWatch.
“You will be under water on your loan almost as soon as you drive the car off the lot,” Alec Gutierrez, a Kelley Blue Book senior market analyst said. “The longer you extend your terms, the longer it’s going to take to come to a break-even position on your loan.”
Experian Automotive recently reported that the average loan term for new cars today is 65 months. More people are moving toward longer loan terms mainly because of higher new car prices and competition among lenders. About 17 percent of new car loans fell between 73 and 84 months in the last quarter of 2012. There was just 11 percent in the same period in 2009.
With more expensive cars in the market, lower monthly payments in long-term car loans allow car buyers to afford the car they want to buy.
However, they are just “lowering the monthly payment at the expense of increasing the overall costs to own that vehicle,” Gutierrez said.
MarketWatch made a comparison between the payments in a 60-month and 96-month car loans.
With new car prices averaging at around $31,000 today, a 10 percent down payment would reduce the loan amount to $27,900. The monthly payment in 60 months or five years at around 2.5 percent interest would be $495. The total interest that will be paid at the end of the term is $1,810 which will kick up the purchase price of the vehicle to $32,810.
Meanwhile, a car buyer would pay $353 every month at a five percent interest rate for a 96-month or eight-year car loan. He or she would pay a total of $6,000 in interest.
This is why Gutierrez said, “It’s silly to do something like a 96-month loan or even a 72-month loan.”
He also added: “At the end of the day, if it’s only a few hundred dollars, then that might work for you. But if it’s $1,000 or more, you should consider if that money can be better spent elsewhere.”
Car buyers are encouraged to avoid long loan terms as much as possible. Consumer Reports recommends paying a larger down payment and considering getting financing from a credit union which offers competitive rates at shorter terms.