By Kelsey Mays on September 5, 2014
Those loans, they're getting awfully long. Experian Automotive says that in the first quarter of 2014, 24.9 percent of all new-car loans were 73 to 84 months long. Four years ago, less than 10 percent of loans were that long. In fact, such lengthy terms have pulled the average new-car loan to 66 months. That's an all-time record.
As credit continues to open up — and, some argue, automakers try to maintain the past year's sales growth — car loans continue to lengthen. But make sure you consider the terms carefully, because even if you can get a longer loan it doesn't mean you should.
Such loans have helped fuel new-car sales, which are up 9.2 percent through July 2014. But some have raised a warning flag. John Mendel, Honda's top U.S. sales executive, told Automotive News (subscription required) that lengthy car loans are "a very, very short-term tactic" that's "probably pulling people out of used cars into a new car that maybe they can't afford."
Ever-longer car loans can exacerbate the strain of keeping up with those payments, too. Experian said on Aug. 20 that one- or two-month delinquencies (i.e., drivers behind on payments) remain at historic lows. But they're edging up.
That's why you need to consider what you're getting into.
"More so with any other product, when it comes to car loans, consumers payment shop," Greg McBride, Bankrate.com's chief financial analyst, told us. But as shoppers focus on the amount of a single monthly payment, lengthier loan terms can sweep some important details under the financial rug.
Consider two scenarios. Let's say you found a four-cylinder 2014 Nissan Altima on a summer sell-down sale for $25,000 out the door, including sales tax and all fees. You planned to put $5,000 down and finance the rest over five years. At a rate of 4.03 percent — Bankrate.com's national average for a 60-month new-car loan as of Aug. 21 — you'd have a monthly payment of $369 and pay $2,116 in total interest over the life of the loan. (We rounded all figures to the nearest dollar.)
But what if a lender offered an 84-month term on the same car? Bankrate.com only surveys loans up to 60 months, but lengthier terms typically carry incrementally higher interest, given average rates for 36- and 48-month loans are below 4 percent. Let's say the 84-month loan carried 4.2 percent interest. That means your monthly payment would fall to $275, and you'd pocket roughly an extra Benjamin every month versus the 60-month loan.
It sounds great, but those monthly savings would saddle you with two extra years of car payments. In short, you'd be paying off your Altima well into the next decade, and your interest tab over the life of the loan would balloon to more than $3,100.
There's another lurking issue. Nissan's factory warranty, like most, stops covering the major systems in your Altima after five years. That means that if your car needed transmission or engine work in the sixth or seventh year, you'd have car payments and repair bills at the same time — a serious financial strain.
Want to sell the car and get into something newer? Longer payments throw a wrench in those plans, too. Residuals calculator ALG pegs the market value of a four-cylinder 2014 Altima at around $9,000 to $11,000, depending on its features, after five years. Here's the problem: At the five-year mark, your 84-month loan still has a principle balance of $6,100. Depending on the repairs needed to sell it at market value, you may not end up with a lot of net cash to buy something newer.
Unfortunately, some consumers don't consider those implications.
"They're looking at two things: What's the monthly payment, and man, that car sure is shiny," Bankrate.com's McBride said. "Being blinded by the love for the vehicle can cloud your judgment on financing matters."
Senior Consumer Affairs Editor Kelsey Mays likes quality, reliability, safety and practicality. But he also likes a fair price. Email Kelsey