Via LearnVest By Jacqui Kenyon ~
Car buyers are increasingly doing whatever it takes to get the ride they want for payments they can afford—and it has some serious implications for their finances.
TODAY reports a growing number of car buyers are taking out longer-term loans to finance their wheels. The average length of a car loan in the final quarter of 2012 was 65 months, a new record, according to Experian Information Services.
People are increasingly opting for 6- and 7-year loans—sometimes with payments that extend into an eighth year. The appeal of these loans lies in their small monthly payments, which allow buyers to get more expensive vehicles without feeling an extra financial pinch each month.
The problem is that people end up shelling out more money overall when they buy a car using a long-term loan. The longer it takes to pay off a loan, the more you pay in interest. Anthony Giorgianni, associate finance editor for Consumer Reports Money Adviser, says that long-term car loans also tend to have higher interest rates.
What Difference Does Auto Loan Length Make?
Consumer Reports Money Lab calculated the overall loan expenses for a new car that costs $30,520, with a 10% down payment by the buyer, using October 2012 interest rates: With a 4-year loan at 3.39% interest rate and a $659 monthly payment, the total loan cost was $34,702. With a 6-year loan at 3.99% interest rate and a $462 monthly payment, the total cost was $36,339. A borrower saves more than $1,600 with the shorter-term loan.
If you need more than four years to get the kind of monthly payment you can afford, you’re better off buying a less expensive car or a used one. Odds are there are more productive things you can do with the money you’ll save with a shorter term loan than pay the bank extra interest.