CBS Philly reporter Jim Donovan observed that despite consumers paying off debt in a slowly recovering economy, there are still some who struggle with making ends meet. And this is the reason why long auto loan terms are, in his words, “gaining traction” especially in new cars.
Donovan shared an example of a lady looking to buy a new car. She is expecting and has bills to pay. Such demands are forcing her to take out a long-term car loan that has lower monthly payment. If she’s looking to repay a $23,000 auto loan with $300 to $350 a month, she will have to do so in 72 months.
Kelley Blue Book Senior Analyst Alec Gutierrez said that a person taking out a $25,000 new-car loan can save $200 every month by choosing to repay it in 72 months instead of 48 months.
Well, that’s true. A low monthly payment often looks attractive to many car buyers, especially those who are conscious of their monthly expenses. But experts say it is also risky.
Just like what other experts are saying, Gutierrez said that the more a loan term is extended the longer it will be for one to get out of the negative-equity position. That means that the longer you take on the loan, the longer you are under water or upside down. Further, that is a time long enough for several things to happen like car accident or severe damage that can cut down the value of your car more.
In addition, experts have been pointing out that long terms come with higher interest rates which make the overall cost of the loan greater.
However, Gutierrez reminded car buyers that long auto loan terms are not entirely bad. As long as you keep your monthly payment to 20% of your gross income, you’re fine. Car loans that are 72 months and longer are still dangerous, though. Experts do not recommend going beyond that.
Donovan suggested Bankrate.com, KBB.com, and Edmunds.com as sites to check out and compare auto loan costs in.