The latest findings from Experian credit trends show consumers are choosing longer loan terms for their car loans
Looking at Car Loan Terms
Here at Auto Credit Express we see that the latest news from credit reporting agency Experian shows that car buyers are opting for longer loan terms for financing a new or used car.
According to the report, the average term for a retail car loan hit the 66 month level during the first quarter of 2014 – a statistic, according to Experian, that represents “the highest level on record.”
In addition to regular car loans, it appears that consumers are also looking at leasing as another way to reduce their monthly car payments as the same report noted that auto leasing also set a record for the same quarter, with 30.2 percent of new car buyers opting to lease a vehicle, compared with 27.5 percent of buyers in the first quarter of 2013.
Car Buyers with Poor Credit
Obviously, the report on leasing won’t mean much to credit-challenged consumers, since buyers have to have good to excellent credit to lease a new car.
The report, however, isn’t necessarily good news for car buyers with bad credit. Here’s why:
In most cases, car buyers pick a longer loan term because it lowers the monthly payment, allowing them to allocate less of their monthly income to a car note. But while the monthly payment is lower, the amount of interest paid to the lender over the term of the loan can increase dramatically – especially with the higher interest rates charged by higher- risk lenders.
Here is just one example:
Financing a $15,000 car, assuming a 7% state tax and non-taxable fees of $120 and a down payment of $2,000 brings the total amount to finance to $15,240.
Financing the vehicle for 60 months, at an interest rate of 17%, results in a payment of around $379 per month. The total interest paid over the loan term, in this instance, turns out to be $7,485 – provided payments are made on time.
Reducing the loan term by 12 months to 48 months causes the monthly payment to increase to $439. That’s the bad news. But although it’s higher, it’s just $2 more per day – about the cost of a cup of coffee.
But the good news is choosing the 48 month term lowers the total interest expense to $5868 – a savings of more than $1600.
Another big benefit – especially for consumers hoping to rebuild their credit – is that doing this reduces the time the vehicle is worth less than the payoff amount. This means they can trade out of their vehicle earlier (closer to the time their credit scores improve) allowing many of these borrowers to qualify for a lower interest rate car loan much sooner than if they had picked the longer term.
As We See It
For consumers with credit issues, financing a vehicle for a longer loan term – especially if the loan has a higher interest rate – can add significantly to the finance charges. On the other hand, financing a new or used car for the shortest term possible lowers the interest expense of the loan and usually allows buyers to trade out of their vehicle sooner so they can take advantage of lower interest rates the next time around.
Oh, and there is one more thing: here at Auto Credit Express we know bad things happen to good people. So every day, through our dealer network, we help people get bad credit auto loans.
So if you’re ready to reestablish your car credit, you can begin now by filling out our online auto loan application.
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