The automotive industry has hit records in 2014 and is on pace for an equally record-breaking 2015. But that’s come with a trend that makes many auto industry watchers nervous; namely, record-breaking average loan lengths, 67 months for new cars and 62 for used, the longest loan terms on record. Why is this a point of concern … and what does this mean for consumers?
Longer And Longer
The overall term of a loan is the number of months you take to pay it off; for example, a four-year loan would have a term of 48 months. So if an average of more than five years seems a bit long to you, it might be. But there are a few different reason loan terms are getting longer and why lenders are letting it happen.
The first is that the longer your term, the lower your overall monthly payment. Longer terms have always appealed to those of us on a tight budget who need a car, and as budgets have stayed tight, longer terms have strong appeal.
Secondly, many customers have needed new cars, but just don’t have the money for a shorter term. Just as records have been broken for loan originations, the average price of a new car has broken records in recent years. While that reflects not just everyday vehicles but also luxury cars and custom cars, high prices can still mean longer terms.
Finally, there’s simply the fact that new cars last longer, have better fuel economy and thus, that Americans keep their cars for longer. Your average car purchased now will easily last more than a decade, and many of us, if data is any indication, intend to keep it until the wheels fall off. Especially for those not letting go of their cars, a longer term is just not a big deal; the car in their driveway isn’t getting traded in any time soon.
Still, there are concerns, and consumers need to be aware of them. Longer terms expose you to certain risks that you need to know about.
The Long Game
The first is the most basic; you shouldn’t be using longer terms to buy more car than you need. It’s true that certain features are nice or may give you a better sense of safety, but so will a few extra dollars in your bank account.
Similarly, not all car loans are created equal. The longer your term, the more interest you’ll pay on your loan, so make a point of doing the math and ensuring you’re not paying more for your car. It is possible to match the overall interest paid, but you may not be able to get an interest rate low enough to make the longer term worth it.
Finally, beware of loans that might put you “upside down,” that is, owing more on the car than the car itself will actually be worth. Only take out longer term loans on cars that will hold their value at the end of the loan term; otherwise, you might find yourself with a trade-in no one wants and a car you can’t sell.