The average cost of a new car has risen by around $3,000 over the last 4 years, while meanwhile family incomes are stagnant. So how has the new car industry managed to sustain solid growth? Consumers have been able to keep monthly payments affordable by simply extending their car loan for a longer term, CBS News reports.
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Just a few years ago, a 36-to-48-month car note was considered typical, with a 60-month loan considered "long-term". Today, only a small percentage of buyers opt to pay off their car in 3 years, a 5-year term is quite common, and more and more buyers are choosing to pay off their cars in 7 or even 8 years. This has helped keep the average monthly payment, the most important stat to buyers when deciding on which cars they can afford, about the same at around $460.
The advantages are plain as day: stretching out payments means more car for those monthly dollars. It also means entry-level cars are now affordable to buyers with modest incomes. Coupled with promotional interest rates - today it is not uncommon to see 0.9% APR or even zero-interest financing for up to 72 months - a long-term loan doesn't necessarily mean shelling out thousands extra in interest to the bank.
But long-term loans come with disadvantages as well. This is felt by car owners who choose to return to market in just 2 or 3 years. A long-term loan means greater debt still outstanding after that period, meaning the buyer may well still find himself underwater when it's time to buy a new car.
For buyers with less-than-stellar credit, a 72-month loan can seem enticing due to low monthly payments, but just know that you'll end up paying a pretty penny in interest. At 6% APR with a 20% down payment on a $31,000 car (the average new car price), you'll end up paying around $1,700 extra in total if you opt for a 72-month loan instead of a 48-month loan.
While a longer-term loan may well be the best fit, consider leaving a few more option boxes unchecked instead, or opting for a slightly cheaper vehicle. Regardless, 6-to-8-year car loans are here to stay.
