The most widely asked question today is basically ‘how long is too long to have a car loan?’. There are many types of loans people take nowadays. Good examples include a U.S. marriage loan, a car loan just to mention a few. The U.S. marriage loan has a time span of eight years as per The Economist.
On the other hand car loans have a time span of six years. However, there is an increase in the number of eight-year time span for car loans. Experian puts it in a very clear manner that, “one-quarter of vehicle loan terms fell between 73 and 84 months last year, compared to just 11 percent of loans in 2008”.
These findings prove that car loans are gaining more popularity than their marriage counterparts. When it comes to second hand or new cars, the loan usually takes 72 months. This makes a 40% credit market contribution. That exceeds the car finance industry loan of 36 months. Melinda Zabritski, a senior employee of Experian, agrees that long-term car loans are a goo thing.
“Consumers tend to be monthly payment buyers,” she says. In addition, she also says that, “To keep that payment low, … spread that payment over a period of time.” She agrees that in the long run the interest paid will be more.
However, she also agrees that, “You might only pay $500 or $600 more over the entire life of that loan but you will save $50 or $70 a month. So the break even point comes pretty darn quick.” Despite all this, loans on cars have increased by approximately $1000 since last year and have hit the $28,381 mark that is the highest ever recorded as per Experian.
Towards the end of 2014, the rate of interest of loan of a new car was 4.5% and a new car’s payment on a monthly basis was $482. These were still other highest recordings. The expense on cars has increased and patterns of purchasing by consumers have also changed.
They prefer less expensive cars due to the economic downtime. However, the American consumers are beginning to improve economic wise and are gaining more purchasing power. So how long is too long to have a car loan? This is a very important aspect to put in mind, according to Zabritski.
Experian also says that eight years is the initial time taken for ownership of a car. This is as much time as one lasts with their partner in relationships. However, when the down payment by consumers is always close to zero and the ownership period is three years, one always easily falls into debt when trying to resell the car before loan completion.
The time taken to trade in a car was 6 years in 2014 as per Edmunds, a research firm that deals with cars.”It’s not what you’d call an enduring relationship,” says its advice editor on consumers Ronald Montoya.
He adds that, “If you have a 72-month loan and get the itch to buy a new car around the average six-year mark, you wouldn’t have enjoyed any time without payments, which diminishes the point of car buying in the first place. At that point, you’re better off leasing the car.”
Experian adds that this trend of leasing is increasing, hitting 30% mark of new cars that have been financed. Another disadvantage of taking too long to repay a car loan is value of resale, according to Philip Reed who is a senior editor for consumers at Edmunds.
He says, “As a car depreciates, there are times when it depreciates steeply and other times when it’s fairly flat.” He also says that each vehicle differs in the way it maintains the value. However one should take caution of certain aspects.”
“I would say that once you get past the five-year mark, not only is it depreciating quickly but you also probably exceeding 100,000 miles,” he adds. Even if this does not incur extra depreciation, he says that it is “certainly a psychological barrier for many car shoppers.”
So how long is too long to have a car loan? Zabritski advises that it is essential to consider different lending rates before deciding. The longer the time of the loan, the higher the rate of interest.
She adds, “We always recommend for folks to go ahead and look at getting pre qualified with their own banking institution — credit union, bank or whatever — so that when they go to dealership they are armed with that information to know what’s a good deal when it comes to obtaining a loan.”
Sourced from: Daily Finance
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