This Day On The Street
Continue to site right-arrow
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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs