Loan terms are spiraling ever higher, breaking records as more and more of us take longer to pay off our loans both to fit cars into our budget and because we’re keeping them for a decade or more. But in doing so, we’re paying more money for our loans… and the more your car costs, the more is coming out of your pocket.
More Months, More Interest
Recently, analysts broke out the difference between a three-year and a six-year loan, and the results should give any shopper pause. Across eight different categories of car, ranging from compact sedans to luxury SUVs, they found that on average, consumers with three year loans saved at least a thousand dollars… and the more expensive the car was, the more money saved, all the way up to nearly $2500 for SUVs.
Why? The longer your loan term, the more interest you’ll pay for your car. So, you double the amount of time that you pay off your loan, it’s going to ding your wallet. True, on a year by year basis, it doesn’t seem like much; per month, many of these work out to roughly to between $14 and $20 extra a month. But across 72 months, that extra $20 a month quickly adds up.
On the other hand, there’s an excellent reason most of us are willing to pay that premium… and why that premium goes unnoticed by so many consumers.
The same analysis shows exactly why loan terms are constantly rising. Take that same compact sedan: On a three year term, the monthly payment is $458 a month, but on a six-year term, it’s $253 a month. And the further up the scale you go, the more money you find yourself saving. A luxury SUV buyer can save $500 a month on their payments, at the more extreme end of payments. At that level, it’s not terribly surprising an extra $40, which is roughly how much extra per month in interest you pay, just disappears into the paperwork.
This is part of the reason consumers are opting for longer terms; it reduces the overall monthly payment of the car. As cars have risen in price, consumers who need a car have found themselves choosing between paying a few more dollars over a period of time, or in some cases not having a car at all.
That said, this gap does illustrate a little-discussed issue with longer terms, how much interest you’ll pay, and it should be a factor in how long your auto loan term extends for. Keep in mind, the more interest you pay, the less your car is fundamentally worth; you get nothing back in vale for that interest, as it’s the price you pay to have the loan.
The best way to balance this is to sit down with a loan calculator and run a few numbers. Look at how much you’ll pay not just every month, but across the entire life of the loan. When you get a car loan, you should know exactly how much you’re paying, and where it’s going to.