Longer financing terms are becoming increasingly popular in the car buying world. In 2008, the average auto loan term was 60 months, and this number has gradually increased over the years, leading to a 66 month average loan term in 2014, according to Automotive News.
When Saving Money Gets Expensive
This increasing demand for extended financing periods is largely due to the increased cost of new vehicles and consumer demand for more options. Customers also want the lowest payments possible, but when it comes to auto financing, saving a little every month ends up costing a lot in the end.
Interest Rates: The longer you take to pay off the loan, the more money you will be spending on interest. For example, a $25,000 loan with an accompanying interest rate of 4% and a $564.48 monthly payment will end up costing you $27,095.04 under a 48 month contract. However, if that loan term is extended to 84 months with a monthly payment of $341.72, your grand total will equal $28,704.48.
Increased "Upside-Down" Potential: A new car starts to depreciate in value the minute that it is driven off the lot and will be worth less every year that it is driven. If you owe more than the vehicle's value, you are upside-down in your loan. And with an extended term car loan, this condition is nearly unavoidable. If you have agreed to a 6 year finance period, but then decide that you want to trade the car in after only 4 years, you will have to pay off what you still owe on the loan or try to have the difference amount "rolled over" into a new loan. Either way, you'll have to deal with a financial burden.
Expired Warranty: Even good warranties only last for so long. If you sign on for a loan that has a life of 5 years or more, it's inevitable that you will be paying for repairs and maintenance out of pocket while you are still making payments on the car. Of course, you can always opt to purchase an extended warranty, but this is still an added expense and one more thing that might make those lower monthly payments a little less enticing.
Talk to the Experts
Car financing can be tricky. You want a monthly payment that you can afford, but you don't want to commit yourself to an unmanageable contract. Here at Drivers Lane, we can help you get a perfectly balanced loan with terms that suit your needs. Even if you have less than perfect credit, we can find a way to get you behind the wheel and back on the road. Just fill out our fast and secure online application to get started today.