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Interest is money. It can’t even cut taxes. So look closely at the cost of extending your loan. Plug Edmunds’ average into a car loan calculator, and someone who finances a car for 60 months for $27,615 at 2.8% will pay a total of $2,010 in interest. Someone who holds up a $30,001 car and finances it for 72 months at an average interest rate of 6.4% will pay three times as much, to $6,207.
So what’s a car buyer to do? There are multiple ways to get the cars you want and fund them in a responsible way.
4 Strategies to Turn Things Around
1. Use a low APR loan to increase the cash flow of your investment. CarHub’s Toprak says you only need a long-term loan if you can get one at a very low annual interest rate. Toyota, for example, is offering a 72-month loan for some models at 0.9%. So, instead of using a 60-month loan with a large upfront payment and paying a high monthly fee to tie up the money, invest the money you release, which can yield a higher return.
2. Refinance your bad car deals and loans. If your emotions take over and you sign a 72-month loan for the sports car, all is not lost. Assuming your credit is good, you can refinance your car loan on better terms without having to pay upfront penalties or fees.
3. Make a large upfront payment to cover depreciation. If you decide to take out a long-term loan, you can avoid being underwater by making a large down payment. If you do, you can trade without having to charge negative equity to the next loan.
4. Rent rather than buy. If you really want a sports coupe and can’t afford it, you can rent it for a smaller upfront fee and a lower monthly payment. It’s an option Weintraub occasionally suggests to its clients, he says, especially because there are some great rental deals. Then, if you still want to buy the car at the end of the lease, you are entitled to buy the car for the “residual value” specified in the contract.
Now that you know the damage a long-term loan can do and the needlessly high interest rate payments, take a moment to look at your car loan. Use our auto loan calculator to find out what you owe and how much you can save by refinancing.
Longer loan terms may seem good, but they have higher interest costs and can expose you to other financial problems, such as owing more than your car is worth.
You’re confident about the hot new sports car, but the monthly payments on your car loan aren’t meeting your budget. The drummer sighed sympathetically and then said, “I have an idea how to make this work.”
He recommends extending your car loan to 72 or 84 months. He explains that your upfront payment will remain the same, but your monthly payment is lower. As he talks, you start imagining the coupe in the garage and show it to your friends.
But wait! Stop daydreaming. Oren Weintraub, president of Car Buying Concierge at AuthorityAuto.com, says that long-term car loan terms put you in a “vicious cycle of negative equity.”
If you want to know where your car loan stands, check out the auto loan calculator at the end of this article. Doing so may even convince you that refinancing a car loan would be a good idea. But first, here are some statistics to show you why 72-month and 84-month car car deals and loans can rob you of financial stability and waste your money.
Shocking car buying statistics
Car deals and loans over 60 months are not the best way to finance cars because, on the one hand, they have higher interest rates on car deals and loans. In the first quarter of 2019, 38% of new car buyers had 61 – to 72-month loans, according to Experian. Even more striking, Experian’s data shows that 32% of car buyers have signed up for car deals and loans of 73 to 84 months – equivalent to six to seven years.
“To close a deal, [car dealers] need to provide comfortable payment options,” Weintraub said. “Instead of reducing the sale price of the car, they offered a loan.” But, he adds, most dealers may not disclose how to change rates and cause other long-term financial problems for buyers.
Used car financing follows a similar pattern, with potentially worse results. Experian revealed that 42.1 per cent of used-car shoppers are taking out car deals and loans of 61 to 72 months, while 20 per cent of consumers are taking longer, with financing taking 73 to 84 months.
If you buy a three-year-old car and get an 84-month loan, it will take 10 years to pay off the loan. Imagine how it would feel to pay off a mortgage on the back of a battered 10-year history.
Long term loan terms are another tool for dealers to bring you into the car because they focus your attention on the monthly payment rather than the total fee. But just because you qualify for these long-term car deals and loans doesn’t mean you should take them.