Consumer Reports: Long loans, lower payments are no deal
Posted October 7, 2015
Raleigh, N.C. — With car sales up, Americans now have $1 trillion in outstanding car loans and leases.
It’s possible to take out a car loan that lasts anywhere from two to seven years, but Consumer Reports says that, more often than not, loans that last that long are not a good investment.
When Jannetta MacArthur bought her Volkswagen Jetta, she wanted lower payments, so she opted for a seven-year loan.
“Financially, I didn’t know if I could handle having the 48-month or the 60-month payments. So I chose the 84,” said MacArthur.
Last year, 29 percent of new cars were financed with an extended-length loan that lasted longer than 72 months.
“Going with an extended-length loan is rarely a good idea,” said Jon Linkov, deputy editor of autos for Consumer Reports. “You’ll likely be charged a higher interest rate, and you’ll end up paying more for the car over the life of the loan.”
If MacArthur were to buy her Jetta today, here’s how the numbers would add up.
With a 48-month loan and 1.99 percent financing, the total amount she would pay in interest over the life of the loan is about $700. With a 72-month loan and 2.49 percent financing, interest would be more than $1,300 and an 84-month loan would be even higher.
Another problem with MacArthur’s loan is that her car will be worth less than what she will owe.
“With an extended-length loan, you’ll spend extra time in this upside-down situation, and if you have to trade in or sell the car, you won’t get enough money to pay off the loan,” said Linkov.
If the car is totaled in an accident, the check from the insurance company may not be enough to replace the vehicle.
Another thing to consider is the source of the loan. More than 70 percent of car loans are financed at the dealership, but customers should shop around.
“Local banks, credit unions and online banks may be able to offer you a more competitive loan and a lower interest rate,” said Linkov.
The key to getting the best deal on a car loan is to spend as much time researching the loan as is spent researching the new car.
Consumer Reports also recommends putting a down payment on the car for as much as the customer can comfortably afford. Their financial experts suggest that the down payment should be at least 15 percent of the cost of the car.