Too often, when people look at car and truck loans, they look at the interest rate, to the exclusion of all else. But another important factor in your loan is the term, or how long you take to pay it off. And, surprising many in the auto industry, the average loan term just hit an all-time high.
Not only did the average length hit a record high of 67 months, or nearly six years, the numbers seem to indicate the average car loan term is only getting longer. Nearly 30 percent of all car and truck loans originated in the first quarter of 2015 were for six years, or 72 months, or even longer. That’s unprecedented in the industry.
That said, though, some other data from the industry contains what’s likely the answer to why longer terms are becoming more common. The longer your loan term is, the lower your overall monthly payment is, simply because you’re slicing up the total cost into smaller pieces. And the average cost of a new car in America rose by a thousand dollars, according to the data.
Admittedly, averages don’t tell the whole story; luxury cars and work vehicles get lumped in with cheap commuter cars and workaday pickups. But it does tell us that the cost of a new car is going up, and that Americans are increasingly choosing to pay for a car longer to make up the difference. The question becomes, is that a good strategy? Or should you look to borrow less?
The main issue with longer terms is that it means you don’t technically own your car for a longer period of time. That exposes consumers to more risk, especially as cars age.
For example, say you take out a car loan with a long term and, towards the end of that term, you’re in an accident. On a loan with a shorter term, you own the car lock, stock and barrel and won’t have to worry about where the insurance payment goes. But if you’re still paying off the loan, your entire insurance payout may go to paying off the balance, leaving you without a trade-in or much to show for your years of payments.
Similarly, over time cars will begin to require more money; you’ll need to invest in repairs, pay more for gas, and so on. Depending on the quality of your car, you may find yourself paying more than it’s ultimately worth in repairs on top of your payments. In the absolute worst-case scenario, your loan goes “upside-down,” with your car being worth less than what you owe on the loan to buy it.
Even in the best case scenario, longer terms cost you more money. The more payments you have, the more interest you’ll pay on the car, driving up the overall cost of your car.
That said, before any loan, you do need to figure out where it fits in your budget. In some cases, the answer really is going to be taking a longer term. Just don’t agree to it without working out all the math.