Posted by on August 13, 2015
A recent article in the Wall St Journal pointed out that auto loans with a term of 73 to 84 months (6-7 years) made up about 30% of all new vehicles financed in the first quarter of 2015 according to a report by Experian Automotive. Just 5 years ago they made up only 9% of auto purchases. That helped bring up the average term for new car loans to 67 months. Five years ago that number was 62 months.
A longer loan period helps to keep the monthly payment down, but in the long run costs more in terms of interest paid over the life of the loan. In addition, a car is a depreciating asset – that means its value goes down over time. With a long loan period of 6-7 years it’s possible to end up with a loan balance that is greater than the value of the car.
To make the best use of your money keep the loan period as short as possible. That way you’ll minimize the interest expense and hopefully enjoy a few years driving a car that is paid off. Better yet, start a “new car” fund and pay for your vehicle with cash.
