With rising new car prices and competition among lenders, car buyers are now opting for longer loan terms of even up to 97 months.
According to Experian Automotive data, the average loan term for new car loans in the last quarter of 2012 expanded to 65 months. In the previous quarter, 17 percent of new car loans fell between 73 and 84 months. Some were even as long as 97 months that is, more than eight years. Only 11 percent of car loans were in this category four years ago.
In Q4 2012, the average new car price rose by $3,000 to $31,000. The average monthly payment, meanwhile, fell by $5 to $460 a month, resulting from lower interest rates and lengthier loan terms.
The lower monthly payments in longer loan terms are attractive to car buyers. Experian Automotive Credit director Melinda Zabritski said that consumers today “tend to be monthly payment buyers.”
Thus, auto lenders offer car loans that can be paid in more than 72 months as their way to keep up with the competition. With a great supply of long-term car loans, car buyers, then, are willing to repay a car loan for 72 months or more to purchase an expensive vehicle.
Banks and car makers have mixed reactions on the said trend. For banks, longer loan terms, which normally have lower monthly payments, attract car buyers. On the other hand, manufacturers are not sure whether or not long loan terms are really profitable for them. With a lengthier term, car buyers can buy a more expensive car but will also take them long before they can make another purchase thus affecting the future sales of car makers.
However, longer loan terms also heighten the risk of being upside down on the loan. Super long loan terms may have lower monthly payments but they keep car buyers from arriving at the point where they owe less than the car’s worth. If they can’t make payments, they will find it hard to sell or trade their car.
Car buyers are advised to take the overall cost of taking a long-term car loan into consideration before signing a loan contract. Extra-long terms can be beneficial in some ways but it can also hurt the credit and derail a good cash flow. Buyers must ensure timely and consistent monthly payments to keep their credit safe and good.