An 8 Year Car Loan?

I attended a meeting last week and I made the comment that I was seeing more and more consumers who have 8 years car loans.  The response was,  I have never heard of an 8 year car loan.  I began to research how often 8 year car loans are offered and the pros and cons of an 8 year vehicle loan.  The consensus seems to be that in order to finance a new vehicle for a monthly payment that lower income consumers with not so great credit can afford, the lending industry will extend the car loan to 96 months.  This 8 years loan was designed by the subprime car lenders to allow these consumers to be able to finance a new vehicle.  The 8 years loan does not save the consumer money and is not a good deal but it is necessary in order to sell new cars to more of the population.

Buying a New Car

More than 86% of new car buyers borrow money to help pay for a new vehicle.  The average monthly loan repayment is $503.00.  The average new car financed as of July 2016 was $28,667.

You are paying a lot more for the vehicle when you extend the length of the loan.  Typically the interest rate is more when you extend the loan and therefore you are paying more in interest not only because you are paying a higher interest rate, but because you are paying the principal over a longer period of time.  Because vehicle depreciate rapidly in the first few years, if you have an auto accident and the vehicle is totaled, you will have to pay out of pocket to pay off the loan on the wrecked car and come out of pocket for a down payment on the replacement vehicle because the insurance will not pay off the loan.  Lastly, most factory warranties end after 5 years, so if you are purchasing a new vehicle in order to get the warranty, you will be making payments for 3 more years after the warranty ends if you finance the vehicle for 8 years.

Help With Your Auto Loan

The federal Consumer Finance Protection Bureau (CFPB) has created an Auto Loan Worksheet you can use to figure out how much a car will really cost when taking inter consideration the longer period of time you pay interest when you extend the car loan.  Basically going from 4 years to 8 years doubles the interest rate if you have a good interest rate of 4.79%.  If you have a bad interest rate of 24% and you are financing a $20,000 vehicle, the amount you pay in interest goes from $11,299 to $25,100.

The bottom line is that if you are extending your auto loan over 8 years in order to afford the monthly payment, you probably cannot afford the vehicle.