According to Experian Automotive, 27.6% of new car loans in the first half of 2014 ranged from 73 to 84 months. With these longer payment plans becoming a trend, people might begin to think that extended loans are a good idea since it reduces the monthly payment. But is a long loan term the best approach to getting a new car? Not really, and I'll tell you why.
In the past, loan terms would typically range anywhere from 12 to 60 months. In the last few years though, longer terms have become more easily available. One thing you must understand is that the more you extend the life of the loan, the higher the interest rate will become. Your interest rate increases because of the heightened risk of defaulting on the loan.
Here's an example: if you are paying 4% interest on an $18,000 loan for 60 months (5 years), your monthly payment will be $331.50 and you will pay $1,889.84 in interest during the life of the loan.
If you apply that same amount to an 84 month plan (7 years), and let's say your interest rate is increased by 2.5%, your monthly payment will go down to $267.29, but you will pay $4,452.35 in interest.
That's a difference of $2,562.51. Just by adding on 2 years to the term, you will have paid over double in interest than in the five year plan. Now, keep in mind that these interest rates are the kind you get when you have good credit. If you have damaged credit, expect your rates to be higher. And, unfortunately, this is only one drawback of a longer loan term.
Your Value Matters
Just because you have a longer loan term, that doesn't mean that your car holds its value for a longer period of time. Your car will depreciate at the same rate as it would in a typical 5 year loan. And keep in mind that new vehicles lose more than 20% of their value in the first year, with half of that occurring as soon as you drive off the lot.
Also, warranties don't last longer. For example, the GM Powertrain Warranty is good for 100,000 miles or five years - whichever comes first. This part is important. If you exceed the 100k mark in four years, the warranty has expired. That means making payments on a car that now is out of warranty for three more years.
If you are between a rock and a hard place, and you need the car now, you may not have a choice. The best thing you can do in this situation is apply some additional money to the monthly payment amount whenever you can in order to pay off the loan sooner.
Some other alternatives you could look into are:
- Buy a lower priced or used car
- Gather up funds for a larger down payment to reduce the term of the loan.
We Have Solutions
It's important to know all the facts before you commit to something, and Auto Credit Express wants to make sure that you get something you can reasonably afford, even if you have a damaged credit history. When you work with us, we will find you the dealer that has the best chances of getting you into the car you need. All you have to do to get started is fill out the quick and simple online application. Start today!