Some time ago the car sales industry deftly changed how they approached you about buying a vehicle - they stopped asking how much you wanted to pay overall for the car, and started asking “How much do you want your monthly payments to be?” There is an obvious psychological advantage in discussing smaller numbers, but it isn’t all about mind games, because how we are buying cars has changed. The days of buying a car and keeping it for most of its serviceable life are long gone. The estimate is that most people change cars every 30 months, and ironicaly enough, as I sat down to start writing this article, an older couple came into my dealership and said; “Our car is two years and two months old, we need to change.”
In order to get you into a car at a payment you are comfortable with, the industry has started stretching out loans to longer and longer terms. A five year, or 60 month loan used to be the most common. According to edmunds.com “In 2014, 62 percent of the auto loans were for terms over 60 months. And nearly 20 percent of the loans were for 73- to 84-month terms.” How much of a difference does that make? In an article on extended car loans on Bankrate.com it is noted: “. . . a $25,000 auto loan at an interest rate of 4 percent will cost you $564.48 per month for 48 months, or $27,095.04 over the life of the loan. The same amount and interest rate over 84 months will cost you $341.72 per month but $28,704.48 over the life of the loan.”
Thats great, right? You get the car you want at a lower price? No - you get the car you want at a lower payment. Extending that 4 percent loan to 84 months will add $1700 to the bottom line price. That is painful, but not as painful as it will be if we take the interest rate up to 6 percent. Under those terms you’ll end up paying over $30,000 for your $25,000 vehicle.
That hurts badly enough - but to add insult to injury, if you try to trade the car in in 30 months, in most cases you going to find that you haven’t come close to breaking even yet, you still owe substantially more than the car is worth. You are not going to gain anything by using it as a trade-in.
So - if you know you and your car are in for a long term relationship, or if your credit/financial situation is such that you need to, then by all means take an extended term loan. Remember though, if you only make the regular minimum payments it’s going to be a while before you’re able to get any value out of your purchase. If you want to trade for a new model in a couple of years, you’re probably going to need a down payment.
Knowledge is Power
For more extended analysis, see: https://www.cars.com/articles/2014/09/seven-year-car-loans-are-growing-but-beware/)
To run your own payment scenarios, see: www.bankrate.com/calculators/auto/auto-loan-calculator.aspx