A while ago I came across a headline that read “Eight Year Car Loans”. What? Ok, I thought I’ve seen it all when it comes to getting someone to buy a car, but this one seemed almost impossible. Is it part of a fake news site, or a scam? I did some digging: sure enough, you can legitimately get a car loan for seven or eight years. That is just two years short of a ten year mortgage, and makes no sense to me at all. Here are just a few issues you want to consider when thinking about signing a seven-to-eight year car loan.
Car loans rank third in consumer debt, right behind mortgages and student loans. Most of us either take out a loan to buy a car or choose to lease. When you start to go beyond the four to six year mark, problems related to depreciation and insurance increase.
The day you drive your car off the lot it depreciates in value- everyone knows this. The depreciation varies depending on the year, make, model and condition of your car. If you’re in an eight year car loan, by year four (I’m being generous here) the amount you owe will most likely be more than the current value of your car: that’s not a good thing! You’re now upside down on your car and will be for another four years. What happens after three years and you don’t like your car or your needs have changed? You’ll have to roll over negative equity from your current car to the new one– that’s even if you can do it, again costing you more money. You also will be paying interest for a longer period of time for something that depreciates ever year.
What happens if your car is stolen or it is totaled in a crash? Your car insurance will cover the loss based on the book value, not on your loan balance. If you owe $28,000 but the book value of your car is $12,000, you now have a big gap to cover. Where is that money going to come from? Well, you can get gap insurance in the beginning to cover the difference, but that’s going to cost you more money.
When you go to purchase your next vehicle, please look very carefully at what makes financial sense for you, not just what monthly payment you can afford. Work out a budget before you shop. Keeping the loan term short and the interest low might mean you won’t be able to get the next model up. However, you probably will avoid being under water on your car for years to come.
Here’s a web site from the Consumer Financial Protection Bureau with practical guidance on auto loans. Check it out: http://www.consumerfinance.gov/consumer-tools/auto-loans/
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Sean’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.