Don’t be enticed by a loan that will last much longer.
Seven years is a long time to wait for anything —but it can seem like an eternity in one situation that comes to mind: A car loan.
A generation ago, most car loans were paid off after 36 months. But as prices rose, loans of 48 months and 60 months became more common. Then we began to hear about 72-month auto loans. Now, Experian says that 25% of new car loans are for 84 months —that’s right, seven years! Why? Well, let’s say you want a car selling for $25,000 and you make a $1,000 down payment, leaving $24,000 to be financed at 4%. Would you prefer to pay $542 per month or $328 per month?
That lower payment is sure enticing, because it leaves you with an extra $214 per month to spend on other things. The catch, of course, is that you’d be opting for a seven-year loan instead of one that ends in just four years. I suspect buyers are choosing seven-year loans because they otherwise can’t afford the cars they want to buy. If you can afford only $500 per month, you can buy a car that costs either $22,000 or $37,000 —depending on whether your loan is paid in 48 months or 84 months. Lots of people choose the nicer car and the longer term.
That’s a problem, though, because cars are not houses. People tend to keep houses for decades, and houses tend to increase in value over time. Cars are the opposite: People sell them far more frequently, their values fall, and their maintenance and repair costs rise over time. That last point is a doozy. (Sorry for the pun; the term’s origin is the Duesenberg, the most luxurious automobile of the early 20th century. A “doozy” came to mean anything prominent or noteworthy. Now back to our story.)
Automobile warranties typically expire after four years, after which you must pay for all repairs and maintenance. If you have a seven-year loan, you must pay for such repairs while you still have three years of payments remaining. And after four years of a seven-year loan, you’ll still owe about $11,000 —more than the car is likely to be worth. If the car you’re replacing is less than seven years old, what makes you think you’ll keep this new one so long? Please buy wisely when shopping for a new car. Be sure you can afford the one you want. If you’re not sure of the amount you can afford and what loan package is best, talk to us first.