This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Is a Longer Car Loan Really More Expensive?

NEW YORK ( TheStreet) -- In the old days, you haggled a price for a car, handed over your down payment and took out a loan for the rest -- usually for somewhere between 24 and 48 months. But now the average loan term exceeds five years -- 64 months, according to Experian, the credit-rating company.

It's the longest average since 2008, and it means many borrowers are paying more for their cars than they have to, in the form of extra interest costs. Some borrowers borrow for six years, even seven.

On the other hand, interest rates are so low that the extra cost isn't all that bad, making the long-term loan a reasonable option for those who want to keep as much ready cash as they can.

Why the affection for long-term loans? Simple: the monthly payments are lower because the principal portion of the payment is spread out further. The economic problems and job worries of the past few years have made borrowers reluctant to take on big payments, even if that saves money in the long run.

Big payments for purchases are especially unappealing compared to the much lower payments on leases. And, of course, lenders are happy to push long-term loans because interest rates are higher and the payments just keep coming, and coming and coming.

The BankingMyWay Auto Loan Calculator shows the cost of two $25,000 loans, assuming no other items like fees or taxes, and no turn-in vehicle.

A 36-month loan at the current average rate of 3.858% would cost a hefty $737 a month. A 60-month loan at 4.55% would cost $459 a month, a lot less despite the higher rate.

While that lower payment is appealing, the 60-month loan could incur total interest charges of $2,998, the 36-month loan just $1,515 -- $1,483 less.

On a purely financial basis, the shorter loan term makes sense. The exception would be a buyer who can take the long-term loan and invest the monthly savings at a fat return.

But in the broader context of real life, the longer loan can be a good move. The smaller monthly payment can produce a lot of peace of mind if the borrower worries about a drop in income.

Spread out over the years the extra cost of the long-term loan doesn't seem so bad, so maybe all these buyers taking out loans for five or more years are on to something.

But it won't always be so. If interest rate were higher, as they usually are, adding years of interest payments could add thousands to the cost of a car.

--By Jeff Brown

More on auto loans:

Match car loan to ownership plan

Pay your car loan off early and save

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $113.29 0.00%
FB $91.01 0.00%
GOOG $630.38 0.00%
TSLA $248.48 0.00%
YHOO $33.14 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs