Shorter car loans are less ‘interest-ing’

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How long is too long when it comes to financing a new vehicle?

Apparently for many buyers there is no such thing as too long, provided the monthly payments are kept low. The average length of a new car loan today is an astounding 70 months, up from about 62 months a year ago, according to the Consumer Bankers Association.

On some higher-priced vehicles, nine-year car loans are starting to appear. And none of these figures take into account buyers who have taken out home equity loans to purchase new vehicles, often extending the payments over as many as 15 years.

For anyone concerned about the smart use of their money, this trend is more than a little troubling.

At the simplest level, the longer a loan is extended, the more you pay in interest.

Consider that just going from a three-year loan to a five-year loan on a $25,000 car can means as much as $2,000 in added interest. With the average transaction price of a new vehicle for 2007 approaching $30,000, going for a seven-year loan can mean that $30,000 car will actually cost more than $38,000, even for someone with excellent credit. Going with a four-year loan would cut the interest cost by nearly 45 percent.

But, another factor involved with longer car loans is that most people don’t keep their cars until the loan is satisfied, and with the longer loans they are “upside down” on their cars — meaning they owe more than it’s worth — for a longer time.

If you’re upside down on your existing car loan when you try to buy a new car, the dealer will usually offer to roll over the balance on the old loan into the new loan. Last year, buyers who were upside down on their loans when they bought a new vehicle owed, on average, about $3,000 on their old loans, compared with $1,700 in 2000 and $600 in 1990.

Conventional wisdom says that a new-car purchase is the largest transaction anyone will ever make, next to buying a new home. But unlike real estate, which is almost assured of appreciating in value over the life of a home loan, cars and trucks depreciate the moment they are bought.

So while it makes no financial sense to extend the life of the loan longer than absolutely necessary, that reasoning seems lost in today’s marketplace.

Here are this week’s reader questions:
Shorter car loans are less ‘interest-ing’
Comparing prices of used cars
Negotiating the price on a lease car
Waiting for all-electric cars

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