Americans love, and often need, cars, and they’ve been buying them in record numbers each month. However, rising prices and an economy that’s still tough in some places has led to consumers asking for, and increasingly receiving, 7-year loans. And it’s controversial not just among consumers and their advocates, but for the lenders issuing the loans.
It should be noted that seven-year loans are relatively rare among car buyers. For example, Honda’s financial arm has been offering 7-year loans since 2007, and despite the availability of the loan and popularity of Honda, 7-year loans make up less than 3% of all loans currently on Honda’s books.
Still, it’s increasingly popular, and the reason is simple: Monthly payments. Think of the term of the loan as the number of slices in a pie; the small each individual slice, the less you’ll pay for each one. A longer term allows consumers on a budget to buy a more expensive car and still fit it into their budget.
So opposition to the 7-year loan among both consumer advocates and even auto lenders in some quarters seems odd. But there are excellent reasons all around to be concerned about these types of loans, and no car buyer should pick one up without knowing what they’re getting into.
Playing The Long Game
The concern for auto lenders is, as always, risk. The longer you have your car on the road and are paying it off, the more likely it will be that something will happen to that car, or that something will happen to you. If a borrower defaults, or far more likely a car is totaled in an accident, that means the lender may be out the money they loaned you and will have to write off a loss. Some are concerned that enough losses will add up to ding the auto lending industry.
Still, the biggest issue with 7-year loans, at least for consumers, is interest. The longer you hold a car loan, the more interest you’re going to pay, and that total interest cost can add hundreds of dollars or even thousands to the overall price of your car. In extreme cases, it can put your loan “underwater,” where your car is worth less than what you’re paying for it. So before taking that term, work out what you’ll pay for it.
Similarly, seven years is a long time in the car world. It’s not nearly as long as it used to be; Americans are keeping their cars for more than a decade, these days. Still, the older your car is when you trade it in, the less it will be worth. In fact, that’s why the finance arms of some automakers don’t offer the seven-year loan; they want to avoid a shortage of used vehicles at their dealerships. So before buying any car on a seven-year term, work out roughly how well the car you’re buying will hold its value.
Overall, the best strategy for consumers is, as always, to do the math on any loan and weigh the risks against their budgets. If you’re going to pay far more for your car than you should, no loan term is worth that.