The auto loan industry is undeniably booming. 2014 was a record year and 2015 looks to be topping it. However, sales aren’t the only records being broken. Increasingly, loan terms are rising and finding new lengths … including the eight-year auto loan. So what’s behind it, and why?
There are several factors driving up the overall rise in loan terms. The most basic is simply the price of cars and their extras; the overall average price of both new and used cars has steadily risen over the last few years, to over $32,000 for new cars and $16,000 for used. While that’s an overall average that includes luxury vehicles and work vehicles, it still means that we’re trending towards paying more for our cars.
Similarly, there are more and more extras we can add to our cars, from anti-theft systems to back-up cameras, some necessary and some just what we want. Still, it can add thousands to the cost of a car, depending on the extras you choose. Similarly, the fees and taxes involved can rise substantially as the cost of your car goes up.
Finally, we’re tending to keep our cars longer and that’s affecting how we buy them. As build quality and engineering of cars has improved, even the most modestly priced new car will last longer on the road with lower maintenance costs. We’re also driving more safely, and thus are less likely to total our cars. In fact, odds are quite good that a car you buy today will still be on the road eight years from now, and will last at least another three years as a used car.
In other words, an eight year auto loan is less likely to worry consumers, but that doesn’t necessarily make it a wise financial choice.
The popularity of six year and seven year loan terms is raising increasing questions both in and outside the industry about whether or not those loans are financially sustainable. But one point in which everyone’s in agreement is that eight-year loans may cost you more than you should pay.
The main issue is depreciation: As we all know, as a car ages, it’s worth less and less on the open market. An eight-year term puts car owners in danger of their loan “flipping:” In other words, you owe more on your car than it’s actually worth.
This means a lot more than a low trade-in value. For example, if you get in an accident, and your car is declared a total loss, your insurance won’t pay what you owe on the loan, leaving you with debt and no car. Such accidents are thankfully increasingly rare, but you’ll still find this issue if you go to trade in your car before you’re done with the loan; the trade-in value won’t even cover the cost of your loan, let alone help defray the cost of a new car.
While an eight year loan term may make sense in certain situations, think carefully about what you’re signing up for. It may not be a commitment you can afford.