Americans love cars and debt, so it’s only natural that they would combine the two. A new report finds that auto loans are becoming more supercharged than ever as financing terms reach record highs. However, consumers should remember to steer clear of buying more car than they can really afford.
The average auto loan term increased to 66 months during the first-quarter, according to Experian Automotive, a global information services company. That is the highest level since Experian began publicly reporting the data in 2006. Making matters worse, nearly 25 percent of all new vehicle loans originated during the quarter had terms extending out 73 months to 84 months, representing a 27.6 percent surge from a year earlier. The average amount financed for a new vehicle loan also reached an all time high of $27,612.
“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,” said Melinda Zabritski, Experian Automotive’s senior director of automotive credit. “The benefit of a longer-term loan is the lower monthly payment; however, the flip side of that is consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early. It is definitely a choice that consumers will want to weigh carefully before making a final purchasing decision.”
The average monthly payment for a new vehicle loan hit a record high of $474 in the first-quarter, driving more buyers to leases. Of all new vehicles financed, 30.2 percent were leased compared to 27.5 percent a year earlier. “Over the last several quarters, leasing has come back as a very desirable option for consumers,” said Zabritski. “Whether they are interested in getting the latest and greatest models or simply do not want to commit to a long-term purchase, consumers are leasing new vehicles in greater numbers than ever before.”
While leasing a car may sound like a good idea at first, most financial advisers agree that purchasing a car is typically the wiser move in the long run. When you lease a car, you never truly own it and will always be saddled with a monthly payment. It can also be difficult to get out of a lease if a financial emergency arises. On the other hand, when you purchase a car, you can build equity and keep the car well beyond the length of the loan, enjoying years of no monthly payments.
Since the price of a brand new light vehicle is about $32,000, car buyers should set some rules for themselves. There are many guidelines for how much drivers should spend on a vehicle, but one common strategy is the 20/4/10 rule. This means that people should put down at least 20 percent, finance it for no longer than four years, and not let total monthly vehicle expenses (including principal, interest, and insurance) exceed 10 percent of gross income. If the only way you can purchase a car is through a 6- or 7-year loan, you can’t really afford it.
Abiding by these rules may mean shopping for used cars instead of new ones, but it will help you escape the pitfalls of debt. If you really want to be conservative with your car buying habits, restrict yourself to only paying cash and keep the vehicle for at least five years.
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