Car Loans: Buyers Are Borrowing More for Longer Periods
The size and duration of car loans are swelling right along with the increase in new-car prices, according to credit-data expert Experian. In its most recent automotive-credit analysis for the final 3 months of 2016, Experian found that the average loan amount for a new vehicle reached an all-time high of $30,621. That's nearly $3,200 more than 3 years earlier and nearly $1,100 more than the end of 2015. Used car prices are on the rise as well.
To combat escalating prices and keep monthly car-loan payments within their budgets, consumers are turning more and more to car loans of longer duration. It's one of the few options for car buyers on a budget who are determined to drive new.
Coming of Age
At the close of 2013, the average term of a new-car loan was 65 months. This number jumped to 68 months by the end of 2016. Forced to finance more, consumers are choosing to extend the term length of their loans. Loans with terms ranging from 73 to 84 months were 20.1 percent of all new-car financing at the end of 2013; 29 percent of all new-car financing for the same period of 2015; and 32.1 percent of all loans by the close of 2016.
For consumers determined to buy a brand-new car, being able to finance a car for 7 years rather than just 3 or 4 years means lower monthly payments. This is all the more important when such car buyers are on a budget.
"Consumers are extending their loans for long periods of time," explained Michelle Krebs, an Autotrader senior analyst. "On the plus side, longer-term loans keep monthly payments down, and today's vehicles are built better than those of the past, so they will last longer. The average vehicle on today's roads is 11.5 years old, a real testament to quality improvements."
Let's face it, a car is only new when, well, it's new. If it's a 2017 model, it will no longer be new in 2018. Financing a vehicle for 7 years means driving it 5 or 6 years before the loan balance is paid down enough that the car's value is more than what you owe. It will have zero trade-in value until that moment. Moreover, despite the monthly payments being lower, you will actually wind up paying more for the car.
"Consumers signing up for long loans need to understand they may well be paying more over time for that vehicle," Krebs added. "And they had better choose their vehicle carefully, because they will be stuck in it for a long time. Their ability to trade it in for something else will be hampered because a longer loan means they will be upside down on the loan for years to come."
Let's assume that continuing to drive your current vehicle isn't an option and you don't have the savings to pay cash for a new car. You can finance a new car for 84 months to arrive at a monthly payment that fits into your budget. Or, if your credit is better than average, you can lease. Currently, the average monthly lease payment is $92 less per month than financing. Of course, leasing is really glorified renting, and you never accumulate any equity.
The other choice is to buy used. Most carmakers have a certified pre-owned program offering lower-mileage late-model vehicles that have been inspected and that often include a limited warranty.
What it means to you: Just because you can finance a new car for 7 years doesn't mean you should. Vehicles decrease in value over time. Period. According to Experian, the average monthly payment on new car loans is $506. Seriously, do you want to be paying $500 a month on a 6-year-old car?