One analyst said it best: “A growing number of car loans will take nearly two presidential terms to pay off.” That’s right – a new car loan is increasingly taking seven years to pay off due to the rising costs of these technological marvels. The question is, are these longer loan terms worth it? Better still – does anyone even keep a car for seven years? If not, does this mean we’re signing up to make car payments for the rest of our lives? After all, if we trade our cars in every two, three or five years, realistically, we’re subjecting ourselves to monthly payments – not to mention the insurance payments – for, well, the rest of our lives. “In this economy?!” you ask; yeah – folks are doing it every day. In this economy.
New Loans Average 64 Months
Experian’s latest report tells the tale. In the second quarter of 2012, the average length of a new car loan rose to 64 months. “Average” is the operative word; many consumers are taking out much longer loans so that they can keep the payments lower. That in itself should send up red flags. Seven years. Look at this way: remember the 2005 Grand Am? The 2005 Nissan? No? Neither do we. It’s not that these aren’t find motorized vehicles – they are. It’s just in a world where we’re changing out iPhones on average about every two years, it’s insane for anyone to think they can commit to a car for the length of a car loan when we can’t even commit to a smartphone.
And by the way – we have an 8.1% unemployment rate these days – with no happy ending in sight. A presidential election that’s coming up that is one of the most controversial in history (for both parties) and bad economic news on top of bad economic news. But we’re committing to seven years of car payments knowing we’re not going to pay those loans out. And we know this because we’re going to trade that model in probably even few years. Ah…human nature at its finest. Anyone who says human beings aren’t their own worst enemies knows little about human psychology.
So what is the biggest growth in terms of the life of a loan? Experian reports those loans with repayment periods between 73 and 84 months are growing faster than others; in fact, 16% of all new car loans were made with those terms during the second quarter of this year. We also like another comparison: the U.S. Census says the “average” marriages are lasting seven years, too.
Weighty Burdens
All irony aside, why would consumers sign up for these weighty burdens? It’s simple: lower rates. In many instances, those agreeing to six year loans are enjoying 2% interest rates, which is certainly impressive, especially considering that was unheard of…wait for it….seven years ago. Still, there are fewer consumers who have the credit that can support these lower rates these days. For others, though, including Keith Legget, vice president at the American Banker’s Association, the mindset is that more consumers are pulling out of their tight credit situations. Not only that, but he says lenders are being a bit more lenient, too. Melinda Zabritski, who oversees automotive credit at Experian agrees.
During the credit crunch, lenders pulled back on loans longer than five years. Those shifts are occurring that suggest those days are past.
Because of that, she says, and now that restrictions are easing, “the extended repayment has been brought back”.
So, they’re available – but should you be signing on the dotted line? The risks are higher and the biggest one we see is thousands more in interest rates over that seven year extended payment plan. Don’t let the low interest rates fool you, either.
The Numbers
Using the average 4.63% rate for new cars, a loan of around $25,000 equates to close to $2,600 dollars in five years. Drag it out to seven years, and that same borrower pays almost twice as much in interest. Then, there are those who know they’re going to be trading that car in as soon as the new car small is gone. In those cases, they often end up owing more than the car is worth – and we know a car quickly loses value in the first year.
So is it worth it? Only a borrower knows whether or not it’s a wise choice for his unique situation. That said, if you’re considering one of these extended loans, you should ask yourself if it’s going to be worth it in the long run. If you like to trade in vehicles every couple of years, you might want to opt for a shorter loan period so that you’re not upside down in it when you’re ready to trade it for the newer model. Also, consider the insurance since this is a big consideration for any big purchase. Ultimately, it comes down to your ability to pay and just how drawn you are to the scent of new leather seats.
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