Remember when car loans lasted for 36 or 48 months? These days, most Americans are driving their new car off the lot saddled with loans of five to seven years, and some are stretching it to as long as eight years.
According to The New York Times, Experian Automotive said the average length of a new-car loan hit a record high of 66 months in the second quarter of this year. Unfortunately, this is one of those times when setting a new record isn’t a good thing. The Times wrote:
Longer-term loans, particularly 72-month loans, “have become the new norm,” said [Melinda] Zabritski, [senior director of automotive finance for Experian]. “I don’t think they are going to go away anytime soon.” She said longer terms were available across all makes and models, and for borrowers with all sorts of credit scores.
This will come as no surprise to anyone who has looked at the price of a new car these days — vehicles have become more expensive. As a result, car buyers are taking out long-term loans to keep their monthly payments down.
Steven Szakaly, chief economist with the National Automobile Dealers Association, told the Times that long-term loans are “reasonable and normal” because cars are built better these days.
However, there are reasons why Money Talks News founder Stacy Johnson has never purchased a new car. And the disadvantages of these longer-term car loans, higher interest costs, negative equity and lower resale value, will take an even bigger toll on your wallet.
If you want to see how much money you could save in interest by choosing a shorter-term car loan, click here to access Bankrate.com’s auto loan calculator. The potential savings can be significant.
For example, if you borrow $25,000 at 3 percent interest over four years, your monthly payment would run about $553 and your total interest would be $1,561. If you change your loan term to 72 months, your monthly payment would be reduced to $380, but your total interest cost would jump to $2,348. That’s a $787 difference.
If you need to extend an auto loan to six or seven years to be able to afford a car, that’s a sign that you should choose a more affordable model.
Credit unions have the best deals
While you should check online search tools and websites for the best auto loan rates, you’ll likely find the best rate from a credit union. We have a new credit union loan comparison service here. Put in your ZIP code, and you’ll find the best rates from credit unions in your area and nationwide.
When you’re applying for car loans, keep in mind that credit inquiries made by lenders will not affect your FICO credit score for 30 days, according to myFICO. After that, multiple credit inquiries done within a typical loan shopping period, either two weeks or 45 days, depending on which version of the FICO score is being used, will count as only one inquiry, so the effect on your credit score will be minimal.
What do you think about long-term car loans? Share your comments below or on our Facebook page. The following video has more tips on getting the best deal on car loans: check it out.