Scott Greenberg could have handled a bigger car payment.
But with a baby on the way and the dealership offering a rock-bottom interest rate, Greenberg stretched the loan to 72 months — about as long as the average American keeps a new car. At 2.64 percent interest, the long term cut about $100 from his monthly payment on the Volkswagen Touareg SUV.
“I will be putting that savings into her college fund,” Greenberg said of the daughter he’s expecting.
The Santa Monica, Calif., technology consultant is among a record number of car buyers taking out loans of six, eight or even 10 years. Loans of six years or longer account for 30 percent of all financing deals so far this year, including leases, according to research firm J.D. Power and Associates. That’s up from 23 percent five years ago.
The standard length of car loans — once four years, then five — has been creeping up for some time. Extended terms are gaining traction in an era when cars last longer and have better warranties. Automakers have marketed the long loans aggressively, persuading some buyers to move up to pricier models they couldn’t otherwise afford. The median-priced new car now costs $28,555, according to Kelley Blue Book.
“Someone who really has the budget for a Corolla figures if they extend the financing out, they can buy a Camry,” said James Lentz, chief executive of Toyota Motor Corp.’s North American division.
It’s the kind of trend that normally makes personal finance gurus sound the alarm. And long loans can still get consumers in trouble, particularly those with tarnished credit who can’t qualify for the best deals. But at historically low rates, longer loans can make sense for savvy buyers with good credit and the intent to drive their vehicles for many years. Such consumers are slashing their car payments and diverting the money to higher-interest debt, investments or other priorities.
Bradley Gallant of Plymouth, Mich., plans to divert extra money each month to investments. He borrowed for 72 months at 1.89 percent from Wells Fargo when he bought a Honda Accord in March. The finance executive at an energy company slashed about $130 from his monthly payment compared with the traditional four-year loan. He’ll shell out only about $370 more in interest over the life of the loan.
“I am confident I could invest the cash in alternative investments and earn a much higher return,” Gallant said.
Although interest rates on home mortgages have started to rise, analysts believe the low rates on auto loans should stick around for some time. Automakers are often more concerned with selling cars than profiting from financing.
“Low finance rates are what is keeping America spending,” said Jessica Caldwell, an analyst at auto information company Edmunds.com.
Automakers make more in interest on longer loans, with little additional risk. Car loan defaults typically take place within six months after purchase, when the car still has much of its value, Lentz said.
Consumer finance experts warn that longer loans work only because of the rock-bottom interest rates — and even then, they should be approached with caution.
“It’s treating a car like a home mortgage,” said Casey Bond, managing editor of GoBankingRates.com, a personal finance information company. “You really have to do the math. Personally, I don’t like paying extra money for the privilege of being in debt.”
Even at low rates, it’s not smart to use debt for purchases that don’t fit your budget, she said.
“My suggestion would be to buy a cheaper car,” Bond said.
- How to avoid wasting money on fees
- Is there a bigger picture to the selfie?
- Dave Ramsey says: Dave Ramsey: Make time to...
- Balancing act: Quest for work-life balance...
- Court sides with Uber drivers to expand case...
- Startup hopes to help children with autism in...
- How Medicare is trying to start a healthier...
- Randy Shumway: Invest in education to...