Money Talks News may earn commission or revenue through links in the content below. Our editorial team independently selects all products. Compensation does not influence our recommendations.
Car loans keep getting longer. Loans lasting 84 months or longer accounted for 25.5% of financed new-vehicle purchases in the third quarter, according to Edmunds data reported by KPRC-TV in Houston (1).
That’s roughly 1 in 4 new-car loans running seven years or more.
The payments keep growing, too. The average monthly payment on a financed new vehicle hit $787, up from $777 in the second quarter. The average amount financed reached a record $44,664, and the average APR held at 7% (1).
A record 21.2% of new-vehicle buyers who financed committed to payments of $1,000 a month or more (1).
Borrowing from a bank isn’t a bargain, either. Commercial banks charged an average of 7.54% on 60-month new-car loans in August, according to preliminary Federal Reserve data (2).
Credit Unions typically offer lower rates.
Edmunds analysts say buyers should consider the total cost of a loan, not just whether the monthly payment fits their budget (1). I couldn’t agree more. And paying cash isn’t automatically cheaper if the cash comes from a traditional IRA (3).
I’ve been a CPA since 1981. If you’re retired or close to it, here are 5 things to know before you sign.
1. Price the insurance before you sign
The car payment isn’t the only new monthly bill that comes with a new car. Your insurance bill may change, too.
So get quotes on the exact model before you commit, not after you’ve driven it home.
You can compare car insurance quotes with Insurify before you sign. Unlike other sites that sell your data, Insurify lets you compare real-time quotes side-by-side without the spam.
It’s fast, secure, and rated 4.7 stars on Trustpilot.
2. Do the five-year vs. seven-year math
Here’s the math on $44,664, the average amount financed in the third quarter, at 7%, the average APR (1):
- Over 60 months: about $884 a month, and about $8,400 in total interest.
- Over 84 months: about $674 a month, and about $11,960 in total interest.
The longer loan cuts the payment by about $210 a month. It also costs about $3,560 more in interest.
That’s the trade. A smaller payment today, a bigger bill overall.
3. Paying cash from an IRA? Watch the tax bill
Some retirees skip the loan and pull the money from savings. That can be smart. But “Distributions from a traditional IRA are fully or partially taxable in the year of distribution,” the IRS says (3).
A $44,664 withdrawal adds that amount to your taxable income for the year. It could also affect your Medicare premiums two years later.
For 2026 Medicare premiums, Social Security says the income it uses is “Generally, this information is from a tax return filed in 2025 for tax year 2024” (4).
In 2026, single filers above $109,000 and joint filers above $218,000 pay more than the standard Part B premium (5). Those thresholds are adjusted each year.
When a big withdrawal affects your taxes and your Medicare premiums, it pays to plan it.
If you need help deciding the best way to finance a car, or have any number of other questions, talk to a financial advisor.
To find one, check out SmartAsset. They offer a free matching service that pairs you with up to three fiduciary financial advisors, all legally required to put your interests first.
They can help with tax savings, investment advice, Social Security strategies, and planning gaps you’d never see alone.
To use the service, expect a questionnaire of about 10 minutes. You’ll be asked for a phone number near the end, but you control whether and when you respond.
SmartAsset provides the match, not the advice, and it’s built for people with $100,000 or more in investments.
Get matched with a fiduciary advisor free.
Quick aside — most internet financial advice comes from people who weren’t alive during the last recession. I’ve been writing about money for more than 35 years. Want rock-solid advice? Sign up for the free Money Talks Newsletter. Takes 10 seconds. No fluff. No spam.
4. Know how old you’ll be at the last payment
Sign an 84-month loan at 70, and your last payment comes due around your 77th birthday.
Ask yourself honestly: Will I still be driving this car then? Will I want to? If the answer is “maybe not,” you could be making payments on a car you no longer need.
5. Shop the loan, not just the car
Get a rate from your bank or credit union before you walk into the dealership. With bank rates averaging 7.54% on 60-month new-car loans in August (2), you’ll have a rate to compare against the dealer’s offer.
And negotiate the price of the car first. The loan is a separate deal.
My honest take
A seven-year car loan isn’t a crime. But in retirement, every monthly payment is a claim on a fixed income, and every year of interest is money you don’t get back.
Buy the car you’ll drive, at a payment you can retire on. Then keep it long enough to enjoy owning it free and clear.
Sources: 1. KPRC 2 Houston; 2. Federal Reserve; 3. IRS; 4. Social Security Administration; 5. Centers for Medicare & Medicaid Services
Add a Comment