Big, long and riskier car loans lasting for more than 6-7-8 years are raising an alarm. Does a long-term auto loan really make sense? Recent car financing trends show a subtle shift with drivers rethinking to keep it within five years at most. Experian reports average auto loan principal amounts are at an all-time high. Average for new car is $ 30,000 and that for used car is $ 19,329. Longer-term loans indicate borrowers are not worried about staying in debt longer. 70 % new and 60 % used car loans approved for more than five-year loan terms is cause for concern.
What are the rational or irrational reasons behind long-term car loans? Are you more than willing to take out long-term car financing?
One of the most rational argument in favor of long term car loans is average age of cars. Software technology and improved manufacturing has shot up average age of cars, SUV and pickups to 11.6 years. People can continue driving it satisfactorily, have a better trade-in value, or simply get better terms at refinance. No doubt about it. People are driving their vehicles longer than ever before.
Selling more expensive make and models is easier with long-term car loans. Salesperson charms potential car buyers with lower monthly car payments into making a larger commitment. They are achieving two targets: selling an expensive vehicle and making a larger commission.
The end does not justify the means. This becomes apparent as monthly car payments or owner-user ship costs increase. Unaffordable car financing runs risks of foreclosures, repossessions and plain upside down car loans. Consider a few risks before you insist on driving home a car.
Risk 1:Under water car loans
Depreciation happens faster than you think. Real amortization of an auto loan takes place in ending years. Refinancing or selling a vehicle early on in long term is nigh impossible because you will owe much more than what the car is worth. Financial problems add to loan balance and car value woes.
Risk 2: Accelerating negative equity cycle
Lender and dealers are accepting underwater trade-in by adding shortfall to new auto loan balance. Also known as shortfall car financing, this draws in borrowers deeper on their next vehicle. This game only delays facing up to a larger loss eventually.
Risk 3: Not many persons want to drive same vehicle for many, many years. Any vehicle outlasts its actual attraction / utility. The preferred purpose is over and drivers crave for a new car feeling. It is as addictive as it gets. If you do not plan to own a car for a long enough time, long-term auto loan does not make sense.
Risk 4: Common sense computations show drivers are just adding total costs with every year they prolong their auto loan term. Young drivers may not feel the pinch due to their full time paychecks covering their monthly car payments. Others need to beware.
A longer-term auto loan makes sense only to those with excellent credit buying new expensive cars. They get all benefits like 0 % interest rates, manufacturer rebates, car dealerships discounts. Financially well off people with no credit worries save huge on car loans with interest rates of 1.49 to 2.19 % for 2-3 year auto loan terms. Naturally, they are investing all the money saved in earning even more money!
Bad credit car buyers with less than perfect credit should stick to buying less expensive make and model. Shorter auto loan terms moderate high interest rates and keep car-financing expenses lower.