Today, consumers get a real opportunity to repay their auto loans in the longer term. Data collected by Experian Automotive provides us with the information stating that terms for almost 25% of car loans varied between 72 and 84 months in the beginning of 2014.
In 2008 the average length of car loans was 60 months.
So today market is filled with record long auto loans. There is an opinion that such situation occurs due to auto dealers’ desire to keep sales growth which they experienced during the last few years.
But consumers should be careful with these long-term loans because they are not always so beneficial as it may seem.
Why it may be not beneficial
These long loans really helped auto dealers to increase the number of sales up to almost 10%. But here is some information which you should consider before applying for such loan. Some experts noticed that this strategy of providing the market with long-term car loans is directed to push people to change old cars to the new ones.
And this doesn’t turn as a cost-effective solution for the pocket of an average consumer. So you need to carefully analyze the cost of the loan before buying a new car.
Though consumers used to shop around before making any financial deal, some important information may be hidden from them when it comes to lengthy auto loans. Here is what bank counselors will not explain to you.
Let us say you want to buy a new car which costs $26 000 including all possible fees, charges and taxes. That is why you take the 60-months auto loan and get the interest rate with the meaning of 4.05% (this is the average rate for 5-year auto loans in 2014).
Thus, monthly payments will be $370 and the total amount of the interest that will be charged is $2 190.
Now imagine another situation when you took 84-months car loan for the same car. The situation is that you will get higher interest rate but monthly payments would decrease.
Let us say that the interest rate is 4.1%. You will have to pay $271 every month which positively influences your monthly budget. But there are 2 extra years when your pocket would be burdened by loan repayments and the overall amount of the interest would be around $3 000.
That means that you will pay more in a long-term perspective. Of course, such loans may be advantageous for those who don’t have a chance to extract large sums from the monthly budget but you need to clearly realize what you are doing.
In the end…
There is some more information that you need to know. When you buy a car you have a warranty from the manufacturer which is valid during the next 5 years.
And if your car needs to be repaired within the warranty card, you will not be able to do that after 5 years. And that mean that you will have to make repairs together with covering the long-term loan. That may be a real burden on your budget.
So, it is reasonable to seriously approach the issue of taking a car loan as well as taking installment loans and consumer loans. Consider everything that makes the deal for you and choose the most appropriate loan.