Car Buyers Opting For Much Longer Loan Terms
Longer loans make for smaller monthly payments, but is it a good move?
Have a baby, and raise him or her until it's time for Kindergarten.
Go to law school. Twice.
Serve one term as a U.S. Senator.
Get an undergraduate degree and a master's degree.
Get married long enough to get sick of your spouse (and by year eight, get a divorce.)
Or, you could buy a car with a 72-month loan and hang on to that puppy until you are good and sick of it.
The percentage of car sales with a 72-month or longer loan has hit record levels, according to recent studies by both J.D. Power and LMC Automotive and Experian Automotive.
"72 months has become the new 60 in the loan market," said Melinda Zabritski, director of automotive credit for Experian.
J.D. Power found that 72-month terms are at record levels, accounting for 32.1% of all car loans. Similarly, Experian Automotive found that 73-84 month loans increased by 19.4% in recent months. Overall, the data shows that the average term for a car loan is currently 65 months.
"Lower interest rates and longer loan terms made it easier for consumers to finance a vehicle while keeping their payments affordable," said Zabritski.
While it may sound awesome to keep car payments low, long loans are problematic. People's lives change, making a 72-month commitment to a car seem ludicrous.
Cars are becoming more and more expensive: The average price paid for a new vehicles right now is around $31,000, up from about $28,000 four years ago. The monthly payment that goes along with that price can be difficult for car buyers to stomach -- The Wall Street Journal reported that buyers like to keep their payment under $500 -- so longer term loans are increasingly becoming the norm in an effort to move more cars off of dealer lots.
Recent reports have shown that lenders are even introducing 75- or 95-month loans, too, and that 97-month loans could become the norm within the next 5 years. (Which is longer than many marriages.)
Should you get a 72-month (or longer) loan?
Since so many people are opting for longer loans, is this a good idea for you, too?
As you may have guessed, the answer to that question is: It depends.
It's certainly tempting to get a longer loan, considering that it brings your monthly payment down, making a car much more affordable and even allowing you to get in a car that is a little more expensive. But, as Zabritski at Experian told AOL Autos, car buyers that opt for this type of loan have to be careful.
"The way that a longer loan becomes a bad idea is if consumers don't hold onto their vehicles or if you didn't put enough money down," she said.
If you want to go with a longer loan term, it's best to either put a lot of money down or keep your car for longer. This can keep you out of financial trouble down the line. Since a new vehicle depreciates literally the second it is driven off of the lot, not putting enough money down can lead to you becoming what's known as "upside down" on your loan. This means that if you want to sell or trade your car, its value won't be enough to cover what you have left to pay on the loan. Not good.
In short, if you plan on keeping your car for a long time (5+ years), a 72-month or even a 97-month loan can be a good option, considering how it can reduce your monthly payments. But, if you're like many car buyers and prefer to swap your cars out every couple of years, it's best to go with a shorter term loan or, at the very least, put a sizable amount of money down on a longer term one.
People are opting for longer loan terms because it keeps monthly payments low, but there is another way to do this without subjecting yourself to the risk of becoming upside-down: Get a cheaper car.
While this may seem like an obvious solution, many people seem to skip right over it. Instead of paying for a $31,000+ vehicle, look at others that cost $19,000-$25,000. While you may sacrifice some creature comforts or badge recognition, the reality is that sub-$30,000 cars are often close to or just as good as those that cost more.
New technology and manufacturing techniques have made less expensive cars safer, quieter, more fun to drive and, simply, better. Instead of a big, loaded sedan, look at smaller ones, like a Chevrolet Cruze. Instead of a huge SUV, look at a smaller crossover like the Hyundai Santa Fe Sport.
As car prices (and gas prices) continue to go up, you as a consumer should think even harder about what you really need out of your vehicle and what is optional to ensure your long-term ownership experience is a positive one.
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