At any given time, a used car purchase is going to make sense for a significant portion of buyers. And right now, choosing a previously owned vehicle over a brand new one may be the best move for even more consumers. This is because, according to Experian Automotive, the cost of new car financing is currently on the rise.
A Used Car Won't Wreck Your Budget
There are a lot of new cars on the market right now that seem very affordable. Makers like Kia, Hyundai, Chevrolet and Ford are offering smaller vehicles with plenty of desirable features for under $20,000. However, according to data tracked by Experian Automotive, new car buyers are financing larger amounts and paying higher monthly payments. These amounts have been steadily increasing since 2008.
Last year, the average amount financed on a new vehicle was $29,551 (in the fourth quarter), reflecting a 4%, or $1,170 year over year increase. And the average monthly payment on a new car was $493, which is up 2.3% over the first quarter average in the same year.
The average cost of used car financing is up a little, but still remains affordable for the average budget-conscious car buyer. Lately, the average used car buyer is financing around $18,850 and can expect to make payments that are around $359 a month.
Having a lower monthly payment is helpful to those who are working to rebuild damaged credit and/or have a limited income. But the real economic benefit of buying a used car is apparent when average loan terms are considered. Because new vehicle customers are financing higher amounts, many of them are taking out longer-than-average loans.
The Expense of Long-Term Loans
Over the course of a year, loan terms of 73 to 84 months have grown by about 12%. They now making up 29% of new vehicle loans. On the other hand, the average loan term for a used car purchase has held steady at 63 months. Only 16.4% of used vehicle loans are currently attached to terms that are in the 73-84 month range.
Why would you want to avoid taking out a loan that will take six or seven years to pay off? There are a few reasons to consider.
- Interest Charges: The longer you finance a car, the more you will pay in interest charges. This can add up to a large expense if you are assigned a higher-than-average interest rate on your loan. And your interest rate will most likely be higher if you have a credit score of 620 or less.
- Negative Equity: With a new car purchase, a long-term loan may cause you to incur negative equity due to depreciation in the value of the vehicle. Basically, you will eventually end up owing more money on the loan than the car is actually worth.
- Income Changes/Unexpected Expenses: Much can happen in 6-7 years. Of course, no one plans on losing a job or landing in the hospital for an extended stay. But these unfortunate events can occur. A long loan term comes with a commitment to making regular payments for years into the future. And because no one can predict what will happen in the future, a long-term loan can be risky.
If you are confident that your budget can cover the cost of a new car, you should get the vehicle you want. However, it will pay to spend some time with crunching the numbers in order to get an accurate idea of which buying option is right for you.
And no matter what kind of car you decide to purchase, make sure that you get the best deal possible on your auto insurance. Click here for a quote.
The Best Financing for Your Situation
If you do have credit issues and need to buy a car, your goal should be to get the most reasonable loan terms possible. Auto Credit Express can help you do this by matching you with a local dealer that can handle unique credit situations. Our process is quick and easy, and the service we offer is absolutely free.
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