A LONGER LOAN FOR YOUR CAR? BAD IDEA

The traditional “20/4/10 rule” of car buying states that you should make a 20% down payment, have a loan no longer than four years, and a total monthly car budget that does not exceed 10% of your take-home pay. But the reality is only 6% of new car shoppers actually followed that advice in March, according to sales data. The average loan term for a new or used car has steadily increased over the last decade and is now about 70 months.

The longer loan terms reflect not only a trend of people seeking a way to offset paying for costlier trucks and SUVs but also inflated prices due to a nationwide vehicle shortage. At today’s car prices, the old rule of thumb is not only being ignored but is also unattainable for most Americans.

“Shrunken inventory continues to wreak havoc on both the new and used vehicle markets,” said Jessica Caldwell, Executive Director of insights. “Shoppers who can actually get their hands on a vehicle are committing to never-before-seen average payments and loan terms.”

In March, 73.4% of financed loans were above 60 months. The most common term was 72 months, followed closely by an 84-month loan. The trend is worse for used car loans. Just over 80% of used car loan terms were over 60 months, with 72 months the most common term.

A longer loan has the carrot on the stick of a more palatable monthly payment, but it comes with a number of drawbacks.

HIGHER INTEREST CHARGES

The longer the term, the more interest you will pay on the loan, both in terms of the rate itself and the finance charges over time. Let’s take a look at how the numbers change on two loans that are on opposite ends of the financial spectrum.