monthly payment of $852. It’s easy to see why
someone would opt for a longer loan.
Contrast that with an 84-month auto loan. The
monthly payment would drop to $563 with
a 5.4% interest rate. It seems like a massive
improvement over 48 months — until you see
the finance charges: $7,990 over the life of the
loan. That’s $6,445 more over the 48-month loan
and yet 34% of new-car buyers are willing, or
forced, to make that compromise.
Now let’s say you purchased a lightly used
car with a 72-month loan term at the average
financed price of $30,830. Your monthly payment
would be $559. It seems somewhat reasonable
from a monthly payment perspective. However,
interest rates are much higher for used cars, and
a rate of 9.2% is fairly common. You’d be paying
$9,403 in finance charges.
NEGATIVE EQUITY
Many auto loans start in a position of negative
equity, meaning you owe more on the loan than
the vehicle is worth due to finance charges and
the initial depreciation hit of about 20%-25%.
The time it takes you to build equity in the car
will vary based on the vehicle’s resale value, the
loan term and down payment. With a 48-month
loan, you’ll break even at about 25 months,
while that would take you 40 months on an
84-month loan.
Having negative equity can limit your options if
you’re in a money bind or if you get tired of your
car before it’s paid off. A buyer will only pay you
what the car is worth, not what you still owe on it,
so you’ll be stuck paying the balance of the loan.