With the average cost of a new vehicle now around $30,000, it’s no surprise that car loans are getting longer and longer, notes Consumer Reports Money Adviser.
Some banks offer car loans with payback terms that run for as long as eight years. While long-term loans translate into lower monthly payments, they can cost you more in several other ways.
Higher interest, more risk
A longer loan means higher interest costs. That’s because you’re making payments for a longer period of time, and longer loans often have higher rates.
To find out how much more you might pay, the Money Lab calculated the difference between 48-month and 72-month loans on a $32,765 car, with a negotiated price of $30,520. The longer loan will cost you about $1,600 more, assuming a 10 percent down payment. If you put nothing down, the difference climbs to more than $1,800.
And longer-term loans are more risky. That’s because cars depreciate over time, with the quickest loss in the early months.
The catch with leases
Another way people lower their monthly payments is by leasing. But if you think that makes leasing less costly, Consumer Reports Money Adviser suggests that you think again.
The first thing you should understand about leases is that whether you acquire the vehicle with a loan or a lease, you’re borrowing the entire value of the vehicle, minus any down payment or trade-in. And you’ll be charged monthly interest on that amount reduced by what you pay back along the way. There’s the rub.
With leasing, instead of paying off the entire car, your payments are based on only the projected depreciation. That’s because, unlike with a loan, you’re not building equity in the vehicle, which you must return when the lease is over.
What to do
When bargaining over a new car, concentrate on the vehicle price, not the monthly payment. And don’t let the dealer sneak any add-ons into the contract.
Concentrating on the price saves you money and shortens the upside-down period, since a lower price means having to borrow less to start with.
One way to make sure you won’t get distracted by monthly payments or anything else is to find out how much car you can afford before going to a dealership. You can do that by using an online loan calculator, such as the one you’ll find at Bankrate.com. (Click on “Calculators” at the top of the page.)
To use the Bankrate calculator, you must have the following information:
• Amount borrowed. Figure out how much cash you can put down and, if you have one, the value of your trade-in. Of course, the larger your down payment, the better off you’ll be. You can research car prices and trade-in values in the Consumer Reports annual car issue each April and by going to such websites as ConsumerReports.org, Edmunds.com and KBB.com.
• Current loan rates. You can get current loan rates at Bankrate.com or by going to the websites of banks and credit unions or online banks such as Ally. The best rates are reserved for those with good credit scores. If you’re in doubt about yours, try prequalifying for a loan by contacting one or more lenders.
• Loan term. You might want to try entering different terms and variables into the auto-loan calculator you’re using to find out what the monthly payments will be and whether it fits into your budget. If you can’t afford to buy the vehicle without taking out a loan that’s longer than 48 months, you probably should consider purchasing a less expensive model.
• Of course, paying cash is best. If you’re financially strapped or just budget-conscious, Consumer Reports Money Adviser says you should avoid leasing. It’s typically the most expensive way to acquire a car.
The price you pay for a longer car loan
How interest costs change on a $30,500 car loan with a 3.99 percent
Length Monthly interest
of loan payment cost
4 years $689 $2,549
5 years $562 $3,194
6 years $477 $3,847