Things I Would Never Do: The 97 Month Car Loan
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Welcome to a new feature I plan on running from time to time here on Frugal Rules – Things I Would Never do. It’s meant to be part rant, part shedding light on unwise practices and part ways to avoid unnecessary debt. It’s not intended to be judgmental, but largely to help those that may be facing similar issues and sharing some things I have learned through mistakes I have made in the past. That said, I hope you enjoy the new series.
I was reading on MSN Money last month about the rise in longer terms for auto financing when individuals are buying a new car. It caught my eye as I have been doing some reading how new car purchasing has increased over the last two to three years. The article spoke of a 31 year-old soon to be mother who had just bought a brand new car coming in at $23,000. To be fair, that price is $8,000 less than the quoted average price of a new car but in order to fund the purchase she took on a car loan of 75 months and a monthly payment of $480! That’s right…she financed her new car for nearly 6 ½ years. This seemed to be just a bit over the top to me, but then the article went on to describe how more and more auto lenders are giving out loans of up to 97 months for people wanting to buy a new car. That is eight years people and just a bit crazy if you ask me.
Is Having a Car Loan a Bad Thing?
I know there is debate as to the wisdom behind buying a new car. Heck, I even wrote a post last week about how to save money when buying a new car. There are many sides to the topic and I tend to be more middle ground when I look at the issue of buying a car, whether it be new or used. That said, let’s face it, many do need cars to make it to work, run errands, etc. True, you can do things like car pool, buy a used car as opposed to a new car, or use public transportation. Not all of these options may be available to everyone, but the point is that there are options to look at and you need to be wise with your purchase – whatever it is. Beyond that, I do not necessarily think that having a car loan is inherently a bad thing. (I know, I am a bad PF blogger.) If done right, especially if you can attain a really good rate then I think it’s fine as long as you do it within reason. When we bought our new car we took a car loan of 48 months, put down a solid down payment and knew that we would get it paid off before the end of the loan. We paid it off with just a little over a year left on the loan and I think it worked to our advantage. That said, I do not think having a car loan is bad, as long as you manage it and do not have a payment that will just be a massive weight on your budget.
What is the Underlying Problem?
The underlying problem I see in all of this is that many are simply buying too much car. They are either not looking at the options available to them or are not being mindful of taking on too much debt. They are looking at it as a monthly payment issue as opposed to simply not buying too much. The auto financing companies are seeing that consumers want to keep their car loans under $500, but is the average car loan of $460 really any better? I think not. This is also not to mention the fact that when new car shoppers take on such a terribly long car loan they are putting themselves in a situation where they will undoubtedly become underwater on their loans and end up paying much more for the car over the life of the loan. Sure, that rate may be low, but if you’re financing nearly $30,000 over the span of seven or eight years the amount will add up and it will not be pretty.
Have We Learned Nothing?
What struck me in this article was that it said that during 2008 and 2009 lenders were much less willing to extend credit to those buying a new car. The money was flowing much less and was more difficult to secure a good car loan. However, as I look back, we bought our new car right in the middle of the Great Recession – the fall of 2008, right when it was hitting the fan. But, we had stellar credit and put a big down payment down on our car. That nice down payment was largely put on our credit card so we could earn the rewards points. If we were buying today, we’d likely use our Barclay Arrival World Mastercard to earn as many points as we could and pay cash for the rest. What can I say, I like to find what will work out best for us given the situation. 🙂
That said, fast forward five years and the banks are at it again handing out money like candy and securing car loans that are reaching eight years. The fact that these extended car loans have raised from 11% of all car loans to 17% over the last three years shows me that we have not learned from history. The article goes on to say that many auto lenders have mixed feelings about this rise but they see that new car buying is going up and that makes the bottom line look good. As a business owner I know that a healthy bottom line is desirable, but is it sustainable? Only time will tell.
What are your thoughts? What is the longest car loan you have ever taken out?
Photo courtesy of: My Aim is True
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.