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Will Your Car Loan Outlast Your Car? (cont'd)
As long as the monthly payments are affordable, finance companies are willing to offer auto loans for 8 years (96 months) and in some cases 9 years (108 months). You are probably asking yourself who in their right mind would finance a vehicle for that time period. Could it be you, a friend or an elderly family member living on a fixed income?
In 1999, only 21 percent of the new cars purchased by consumers were financed for over 60 months. However, a startling report by the Consumer Bankers Association indicated that over 55 percent of new cars purchased by U. S. consumers in 2005 were financed for more than 60 months. So, that means every other person that financed a new car in 2005 extended their payment term for more than 60 months.
And, to add to that, the Federal Reserve has raised interest rates 17 consecutive quarters since 2004. Yet, our yearly raises are not keeping pace with the frequent price increases of new cars or the rising interest rates. These factors continue to cause consumers to stretch out their loans.
The median age of cars and trucks in operation today is 9 and 6 years respectively, according to R. L. Polk, a car registration data mining research firm. Do you really want to finance a car for 6, 7, 8 or 9 years? By the time you finish paying for the car, it will be time to start the payment cycle all over again with another vehicle. Before you finance a car for an excessive time period, here are some points to consider:
More consumers will find themselves in an upside-down situation at the time of trade. According to the Power Information Network, over 33 percent of all consumers that traded for a new vehicle during the first half of 2006 were upside-down.
In order to cover the negative equity in the trade, consumers will have to bring more money to the table. Many automakers are attempting to reduce rebates from their 2005 record highs. Hence, consumers will be less dependent on rebates to help cover some of the negative equity. Moreover, since some automakers are offering free gas, consumers cannot quantify that amount to help offset the negative equity in the trade.
After the basic 3-year or 4-year bumper-to-bumper warranty coverage on the car expires, what maintenance and out-of-warranty expenses will you incur? It never fails that consumers will begin experiencing more out-of-pocket expenses once the warranty expires. Consumers should consider purchasing an extended service contract by the automaker to compliment the terms of their loan. Nothing is worse than making car payments and out of warranty repairs simultaneously! Upon doing some research, you will find that most automakers offer a service contract to cover up to 7 years or 100,000 miles.
As the term of the loan increases, the interest rates usually rise. Typically, most automakers offer lower interest rates if you plan on financing for 60 months or less. In some cases, automakers may offer 0 percent interest for up to 72 months on slow selling vehicles. However, according to Eloan.com, if you are purchasing a vehicle without any interest rate concession by the automaker, the average interest rates for a new car loan for 36 months or less is 5.99 percent, whereas a loan for 61 to 72 months rises to 6.89 percent. These numbers are based on a credit (FICO) score in the high 700 range. The lower the credit score, the higher the assigned interest rate. To find out more information about credit and credit scoring visit our credit center. And to calculate your car payments, click on our car payment calculator.
Consumers should consider steering toward leasing for lower payments. Leasing was designed for consumers to buy a more expensive vehicle at a lower payment range. This option could help consumers avoid experiencing negative equity as long as they maintain the vehicle and stay within the mileage limits established in the lease agreement. To find out more about leasing, visit our leasing center. Now if you are a high-mileage driver, steer away from this option!
For automakers and dealers, more consumers will be pulled out of the market from buying a new vehicle if they finance a vehicle for more than 60 months. This could cause a backlash in the auto industry and in the economy. Consumers will buy fewer cars, and auto plants will be forced to produce fewer cars, resulting in the lay off of assembly workers and the vendors that supply parts to the automakers.
And of course you would not finance a high-mileage used vehicle for more than a few years. Is that the best decision? You could definitely find that your vehicle could possibly outlast your car loan. If at all possible, paying cash is a better option.
Are you buying more car than you can afford? Consider stepping down to a more affordable vehicle. Your checking account will appreciate the lower payments and the shorter finance terms. Furthermore, you are less likely to be upside-down at the time of trade.
