Experian’s quarterly “State of the Automotive Finance Market” report gets worse each time I read it, and the third-quarter summary for 2015 (the most recent available) was no exception. The credit reporting agency’s ongoing analysis packages the horrors of American consumerism into easy-to-read charts and graphs so ugly they’ll make your eyes bleed. Want more details? Let’s dig in.
In the third quarter of 2015, the average monthly car payment surged to $482, up $12 per month from the year before. But, brace yourself, it gets worse. The average term of a new car loan is now 67 months – or five-and-a-half years and can extend for as long as an 84-month auto loan.
In other words, we’re not only paying more than ever per month for our cars, but we’re paying it longer than ever, too.
More depressing is the fact that the average new car loan surged to $28,936 during this time — that’s just a hair less than the average debt burden of college students who graduated from four-year schools in 2015. Sure, you can’t drive a bachelor’s degree — but a new car doesn’t increase your lifetime earning potential by nearly a million dollars.
All of those facts combined paint an ugly picture of our love affair with cars we can’t truly afford. Sadly, the news keeps getting worse – with no end in sight. If you think a 67-month-long car loan sounds crushing, you ain’t seen nothing yet.
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The Longer Loan Trend
In order to make new (expensive) cars more affordable for the average consumer, some lenders have rolled out super-sized loans with enormous timelines. According to the Experian study, the average loan term for deep subprime borrowers buying new cars was 72 months long – or six full years.
Then there’s the 84-month car loan. Consumer Affairs wrote about this awful idea last year, noting the many reasons why a seven-year car loan is the worst of all worlds. Only a few lenders have rolled out this product, the piece notes, but not because they’re worried about consumers getting in over their heads; it’s mostly because car companies want you to buy a new car more often than every seven years.
Five Reasons to Avoid 84-Month Auto Loans Like the Plague
An 84-month car loan will make your monthly payment more affordable – that’s a fact. But it will also drag that payment out so long you’ll eventually beg for mercy.
No one – and I mean no one – should consider taking out an 84-month auto loan under any circumstance. Here’s why:
Reason #1: You’re going to pay a lot more interest over time.
Experian lists the average interest rate and loan amount on new vehicles to be 4.6% and $28,936, respectively, for the third quarter of 2015. If you borrowed that money for the average loan term of 67 months, you’d pay $491 per month and fork over $3,930 in interest during that time.
But, what happens when you take out an 84-month car loan? If you managed to get the same decent interest rate (which is unlikely), your monthly payment would drop to $404 per month – but for a full seven years. Lastly, you would pay $4,963 in interest over the life of the loan, over $1,000 more.
And if you weren’t able to secure such a low interest rate, your total costs could really skyrocket from there. Want to play around with the numbers? Check out our debt payoff calculator.
Reason #2: Your loan will definitely be upside down.
A new car depreciates 9% the instant you drive it off the lot, according to an analysis by Edmunds.com. A year later, that same vehicle has lost almost 20% of its value. And by the end of year five – which is normally the end of any new car’s warranty period – your prized possession could be worth as little as 37% of what you paid for it.
Accepting an 84-month car loan means you’ll achieve a lower payment, yes, but it also means paying down your loan’s principal at a turtle’s pace. And while a smaller payment may be easier to manage, it means you may owe more than your car is worth for a long, long time — which can leave you on the hook to pay the excess balance if you sell your car or it gets totaled in an accident.
Reason #3: There is no such thing as an 84-month manufacturer’s warranty.
If you’re able to stomach the extra interest you’ll pay, an 84-month car loan might seem like the ideal way to score a low payment. But, what happens when your manufacturer’s warranty expires?
Let’s face it: Six- and seven-year-old cars start needing pricey repairs, and when your car isn’t under warranty, you’ll be on the hook for those expenses. That wouldn’t’ be so bad if you owned your car clear and free by that point, but your 84-month loan makes that impossible.
In other words, you may need to pay for expensive, old-car repairs while you’re still carrying that hefty new-car payment. That’s a double whammy you’ll want to avoid.
Reason #4: You’re probably buying more car than you can afford.
Another reason to avoid 84-month car loans is a simple one. If you have to make payments on something for 84 months in order to purchase it, chances are good you can’t afford it in the first place. The big exception is, as always, a house you and your family plan to live in.
Here’s the cold, hard truth. Financing cars, boats, cell phones, and furniture obfuscates the real cost – it takes what you would normally pay (in the case of the average new car, about $30,000) and breaks it up so it isn’t quite as painful. That might make driving off the lot easier on your wallet, but it will make you a whole lot poorer over time. Saving the money ahead of time and paying for a car in cash may force you to wait longer for what you want, but it forces you to be realistic about what you can actually afford.
Reason #5: Your car is a depreciating asset.
Remember how fast your car loses its value once you drive off the lot? After five, six, or seven years, your car will be worth a small percentage of what you paid.
Kelley Blue Book lists the 2016 Honda Civic base package listed with an MSRP of $19,475. Yet, similar 2008 models are going for anywhere from $5,523 to $6,722 at dealerships – and even less if you buy one from a private seller. And that’s for an automaker that fetches higher-than-average resale value.
Let’s face it: No matter how much you love your new car, you will eventually give it to your teenager, trade it in, or sell it on Craigslist for a few thousand bucks. If you get plenty of use out of it first, that’s perfectly okay. But don’t use an 84-month loan to dump more money than you can afford into a poor investment.
The Bottom Line
If you’re an average American, you’ll pay $482 a month long enough for your newborn to hit kindergarten, and all for the sake of driving a car that will be worth almost nothing when you’re done. If you want to double down on that mess, you can take out an 84-month auto loan and spend a couple more years hoping it doesn’t break down until it’s paid off. Or worse, you’ll trade it in near the end of your loan’s term and start the entire process over again from scratch.
Don’t be average. A quick look at the math – and the facts – should be enough to turn you away from the dealership’s siren call. That new-car smell will fade quickly, but that loan may never go away.
Despite whatever your car dealer told you, you need an 84-month car loan like you need a case of herpes or a broken leg. While you may need to borrow money to afford a reliable car to get to work, there are plenty of better car loans to consider that won’t last seven full years of your life.
Do you think 84-month auto loans are too long? Why or why not?