It’s an ongoing trend; terms on new car loans are steadily rising. And it’s one so clear that one of the biggest names in auto lending, Ford Credit, has decided to begin extending 75-month terms on some loans. What does this mean for the consumer, and how will it affect buying a new car?
Following A Trend
The term of the loan, or how long it takes for you to completely pay off the car, has been going up for a while thanks to a combination of factors. First, securing a low interest rate across the life of the loan has gotten easier for borrowers from all walks of life, meaning that even longer terms don’t result in a higher overall cost for the car.
Secondly, the price of a new car has steadily risen over time, with the average currently sitting at roughly $31,000. While that includes luxury vehicles and other cars most of us wouldn’t look at twice, it still demonstrates that the cost of a car is rising and that customers need to figure out where it belongs in their budgets.
That said, loans with unusually long terms are still relatively rare in the industry; most of us simply prefer to get the car paid off as soon as possible. However, one of the largest auto finances beginning to offer these loans can’t be ignored, by the financing industry or by consumers.
A Small, But Growing Sector
Ford Credit notes that it doesn’t expect these longer terms to be a large part of their business. And, in fact, while making the announcement, Ford Credit made it clear they’ll push consumers to accept shorter terms where at all possible. But it also can’t deny where growth in auto financing is, and loans with terms as long as 73 to 84 months have become very commonplace in the industry.
The move by Ford Credit is a cause for concern among consumer advocates. A longer term makes it more likely you’ll go “upside-down” on your car; that is, that you’ll owe more on your car than it’s actually worth. In the worst case, this would mean that some car owners would have to borrow to cover what they have left on their loan when buying a new car, creating a spiral of debt. Even without that, there’s concern that such a large lender giving legitimacy to such loans will create a “gold rush” of sorts as other lenders do the same.
In truth, what it comes down to is you as a consumer. When securing auto financing, whether you go through a dealership or work with another lender, do your research. Work out the value of the car you want to buy and how it will depreciate in the future; if the loan will wind up being more than the estimated value of the car, look for another loan. Determine what you can afford inside your current budget and make that your starting point when shopping for financing. Consider late-model used vehicles instead of new ones.
Above all, though, think ahead when shopping. Secure your financing first, and then look at the cars you can afford. That will keep you from having to pay too much, or take a longer term than you need.