More and more automakers are offering longer financing terms, but is it a good idea to commit to an eight year long auto loan, or is the dealer just out to get your money?
It’s always a good idea to get a budget sorted and have an idea of what your financial situation is before making a big purchase like a car. Fitting a car into your budget isn’t always easy, which is why most new car buyers tend to mainly focus on a car’s monthly payment. However, lower monthly payments can lead you into the trap of longer auto loans, and ultimately make you pay more for your vehicle.
This is due to interest rates. The longer your term, the more interest you pay on your loan. The numbers prove this point, and it’s not a pretty picture.
SAVING MONEY OVER THE LONG TERM
The 2013 Nissan Altima SV has a MSRP (Manufacturer Suggested Retail Price) of $24,870. Nissan offers 0% financing up to five years. Financing a car for three years after a $3,000 down payment would give you monthly payments of $608 a month. Compare that to a 75 month loan from Nissan which comes with a 4.59% finance rate. At just $336 a month, monthly payments drop quite a bit. However, after the 75 month period the total amount of money that’s been spent on the loan comes to $27,450, and if you include the $3,000 down payment you’ve paid $5,580 more than the original MSRP of the car when it was brand new.
Despite the lower payments, you actually end up paying more for the total price of the car. To most savvy consumers, that’s called a rip-off.
RESALE ONLY WHEN PAID OFF
Longer loan periods also affect how you sell the car and what you can get back for it. For starters, you can only sell a car that is under your name, not when its titled to the bank or a financial institution. Only after the loan is fully paid off can you sell the car.
Since cars are a depreciating asset, they’re worth less money as they get older. At seven years old, you won’t be able to sell a car for nearly as much as a five year old car. For example, a five year old car has lost about 55 percent of its original value, while a seven year old car loses 68 percent. That 2013 Nissan would return roughly $3,233.10 more if you sold it after five years, instead of after seven. Again, opting for a shorter loan period pays off where it counts, in your wallet.
SEE ALSO: Should You Buy or Lease a Car?
Also, keep in mind the value of a car for a trade in. Some dealers will give excellent trade-in value to a car that can be certified and sold as a CPO car. However, very few automakers offer CPO cars that are seven years old, meaning there’s a low chance of getting a good deal on a trade in.
Adding insult to injury are loans that have a penalty for paying them off early. That means if you finally have the chance to pay off your long loan you can’t escape the interest. Maybe you got a raise or a bonus and want to put that lump sum down to pay off the last 18 months of your car payment. Under many loans, even if you do that you’ll still have to pay the interest you would have incurred in the form of an additional fee.
There’s almost no advantage to getting a longer loan period. If you can’t pay the monthly payments on a shorter term, then maybe you’re looking at a car outside of your price range. If you aren’t willing to buy a vehicle in a lower class, thankfully, you do have other options.
Leasing a car is a good idea for someone who wants to drive a new car for less. Unfortunately, the money you spend on a leased car doesn’t go towards actually owning the vehicle, so it might not be a financially sound solution for the long term.
Additionally, consider a CPO or used car to get a cheaper vehicle in a higher class than you can afford. Some dealerships also offer financing on these kinds of vehicles, so it is possible to get an affordable monthly payment without paying a lot of interest over a long period of time.