Car Loans Are Getting Longer
The average repayment duration for car loans used to be around 5 years.
Yet, according to a recent report from Experian, the first quarter of 2019 saw a steep increase in loan terms.
Currently, 84-month terms on auto loans are quite common.
While it does reduce your monthly payments, is it a sound financial decision? As more and more Americans continue to opt for longer repayment terms, the number of new loans with terms between 85 to 96 months increased by 38% since 2018.
Experts say that this rising trend of extended terms is due to the fact that the aggregate debt-to-income ratio is at an all-time high.
Mortgages, student loans, monthly expenses, and more add up to most of the monthly expenses. Hence, fitting in a new car within a limited budget forces people to opt for longer terms.
Is It Worth It?
Honestly speaking, there aren’t many benefits to a long-term auto loan.
Yet, it can be a good choice in these circumstances:
- You Need Lower Monthly Payments - An 84-month loan will give you a lower, more manageable monthly installment. For instance, a $20,000 loan at 3.11% for 60 months means a monthly payment of $360. The same loan for 84 months means a monthly payment of $265.
- You Have Other Ongoing Debts With Higher APRs - A longer loan term can help you utilize the remaining funds to clear off other debts. From the above example, you can save $95 per month which can be utilized to pay off other, more expensive debts.
When you calculate the overall long-term costs, you’ll probably realize that an 84-month long auto loan isn’t worthwhile.
Hence, it’s pivotal to do your research and compare other available alternatives before choosing.
What Are The Downsides?
The truth is that opting for an 84-month auto loan can be extremely risky.
Here are some notable downsides that you must consider:
- Going Upside Down - A new car starts losing value the moment you drive it off the dealership lot. In the first year, your new vehicle depreciates by at least 20.00%. The longer the term of your loan, the higher the chances of negative equity.
- Higher Interest - When you stretch auto loans beyond 60 months, you’ll see a sharp rise in the rate of interest. For instance, a loan of $20,000 for 5 years at 4.50% means a total interest of $2,371.60. The same loan for 84 months means a total interest of $3,352. That’s an additional $980.
- Additional Costs Of Repair - A car aged 6 or 7 years is estimated to be driven over 75,000 miles. This older car certainly will need more maintenance, be it related to tires, the engine, brakes, or other parts. Furthermore, you’ll also run out of warranty during this extended term. If you opt for an extended warranty, it’ll cost you more money.
How Else Can I Keep Monthly Payments Down?
Instead of opting for an 84-month auto loan, there are quite a few alternatives that you can consider.
Here are some options:
- Leasing A Car - Lease payments are considerably lower as they’re based on the vehicle’s depreciation while you’re using it instead of the actual selling price.
- Arrange A Larger Down Payment - You can avoid the negative equity by putting in a larger down payment if you’re choosing a long-term loan. This will also assist you in trading the car without dragging in the negative equity onto the next loan.
- Choose a less expensive model - You can choose a less-expensive model. This will help you get lower monthly repayments and a shorter term, thus helping you save.
It’s important to look at the overall costs rather than the short-term gains.
Do not settle for the first lender that sends you the quote, but instead calculate the requirements and affordability before considering an 84-month loan.
We recommend using online auto loan calculators to get a better estimate before you make the final decision.