When it comes to making smart money moves, our family has never been a big fan of buying a new car. In fact, the last new car that we bought was back in 1993 when we really did the math on how much smarter it is to buy a used car that is somewhere between two to four years old versus getting a new one. While getting a new car should be a well thought out planned purchase, it often falls into the camp of a spur of the moment purchase depending on when you get in the mood. In a sound financial plan, you should begin to save for the (new) used car purchase the moment that you pay off the old purchase. Recently, an article came out which sent my financial sensors into outer space.
Experian Automotive says that in the first quarter of 2014, 24.9% of all new-car loans were 73 to 84 months long. Four years ago, less than 10% of loans were actually that long. In fact, such lengthy terms allowing consumers to extend the life of their debt have pushed the average new car loan to a whopping 66 months. That is an all-time record. Is a seven year car loan really a good idea at all?
No. Simply put, this is one of the worst ideas I have come across for consumers and here is why:
- Interest Payments- There is no question that you’ll pay more interest over a longer loan. The interest rate may seem cheap on some of these loans, but you’re still paying out interest and not earning it.
- Your Real Differential- On many of the loans taken out, the difference between a 5 year loan and a 7 year loan won’t even save you a $100 a month. In many cases it will be $50 to $75 a month. If that is the make or break on whether you buy the car, you might need to reconsider your price range altogether.
- Resale/Trade- The average length of time someone holds a car in the US today (according to answers.com) is 71.4 months. It’s probably that with the existing loan you will be upside down on a trade in which causes a cascading effect on the next purchase.
- Wear and Tear- The longer you hold the car, the more likely it will be that ongoing maintenance issues arise with the vehicle. Now you have to pay for those issues along with a payment.
- Warranties- Many warranties will end after a few years or eventually when you hit 100,000 miles. With no warranty, you could be exposed to even more ongoing repair bills.
As a consumer shopping for a new car (or a used car like I recommend), it is important you consider all of these implications before you sign away your life on a long term note. You might like the smell of the new car, but you won’t like the smell of the Benjamin’s being burned up with interest payments for seven years. In general, I wouldn’t have your loan be any longer than five years and make sure the car payment itself is something you can afford in your budget for the long haul. Don’t worry, in 71.4 months you’ll have the itch to drive something new.