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Will Your Financing Outlast the Car You Buy?

Will Your Financing Outlast the Car You Buy?

You’re at the dealership, and the salesman is trying to cajole you into buying the expensive car you really want instead of your practical, cheap, and boring original choice. He works his magic with the numbers, and he suddenly produces a seductively low payment that would fit into your budget. Then you see how long the term is, and you balk at the prospect. If you have reservations about long-term auto loans, you have good reason to be. You should avoid excessively long-term loans for several reasons, one of them being the fact that the loan may actually outlive the vehicle you’re buying.

An Alarming Trend

The terms of auto loans continue to get longer and longer, which only ends up hurting car buyers in the end. The standard auto loan term used to be around 36-48 months, which allowed car buyers to have reasonable monthly payments without burying themselves in interest costs over the life of the agreement. This norm has shifted dramatically. Consider the following statistics:

  • 89% of new-vehicle auto loans have terms longer than four years
  • 55% of new-car buyers opt for agreements with terms longer than five years
  • The most popular auto loan term is now six years, or 72 months

Pros and Cons of Long-Term Loans

So is a long-term agreement really a good idea? Long-term loans do have a few advantages; namely, they offer very affordable monthly payments and more buying power to consumers. With a lengthy loan, a consumer can purchase a much more expensive vehicle than he or she would otherwise be able to afford. On the other hand, the disadvantages of excessively long auto loan terms outweigh the benefits. For one, these loans delay ownership while the automobile continues to decrease in value. So, more than likely, the driver will be upside-down in the loan, or owe more than the vehicle is worth, for the entire time he/she owns the vehicle. Additionally, these loans have higher interest rates and higher overall interest expense. In other words, they end up costing the buyer more when all is said and done.

The Solution

The bottom line is that auto loans these days will more than likely outlast the vehicles they finance if the terms are excessive. Remember that a car is a depreciating investment; the longer you drive it, the less it will be worth. Thus, it’s in the best interest of your finances to keep your auto loan terms as short as possible. Ideally, you should aim for terms of 36-48 months. To make this possible, you may have to save up a higher down payment, make budget cuts, or buy a cheaper car. But when your vehicle ends up living longer than your payments, you’ll be glad you did.

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