In the first quarter of 2015, the average term for a new-vehicle loan was 67 months — more than five years. The average term for a used-car loan was almost as long, 62 months.
Almost 30 percent of new-vehicle loans in the first quarter were even longer, 73 to 84 months, Experian said. That’s six to seven years.
Until recently, such long-term loans for cars were very rare. Are they a good idea? Should you consider one?
Buying More Expensive Cars — and Borrowing More to Do It
Here’s what’s driving the trend: People are buying more expensive cars.
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On one hand, people are taking on more debt. But on the other hand, “People really are getting more car for the money,” says Jessica Caldwell, director of industry analysis forEdmunds.com.
Caldwell notes that while the average new-vehicle loan term rose even further in May, to 67.9 months — the highest ever — interest rates also fell. “The average new vehicle loan APR fell to 4.6 percent in May from 4.8 percent in April,” she says. That’s likely due in part to “zero-percent” financing offers from automakers, which Caldwell says were “abundant” in May.
Longer-term loans and lower interest rates are allowing buyers to spend more on their new cars. Kelley Blue Book said that the average transaction price for a new vehicle in the U.S. in May was $33,363, up 4.3 percent from a year ago. KBB senior analyst Karl Brauer noted that some of the increase is being driven by strong demand for pickups and SUVs, thanks to lower gas prices. SUVs tend to be more expensive than comparable cars.
Not surprisingly, loan amounts are up, too. Experian says that the average new-vehicle loan was $28,711 in the first quarter of 2015, up from $27,612 a year ago.
But do these loans make sense for consumers? Isn’t it a bad idea to take on more debt just to have a fancier car?
Isn’t a Longer-Term Car Loan a Bad Idea?
The short answer: Not necessarily.
There are two factors that could make a longer-term loan make sense. First, interest rates are very low right now, especially if you score one of those zero-percent financing deals. But even if you don’t, rates are still very low, historically speaking — especially if you have good credit. That means the overall cost of buying the car might be lower than you think, even with a longer-term loan.
Second, you might not mind keeping your car for six or seven years — or even longer. Lots of people are doing it: The average age of a “light vehicle” (the industry term for cars, pickup trucks, and SUVs) on the road in the U.S. is now a little over 11 years, according to IHS Automotive.
IHS’ analysts don’t expect that to change any time soon, in part because of the increasing quality of today’s cars, trucks and SUVs. The intense competitive pressure to improve quality in the auto business means that today’s cars — from just about any automaker — have the potential to last a very long time and accumulate very high mileage without needing huge, costly repairs. That’s a big change from what was true as recently as a decade ago.
So if a longer-term loan helps you buy a car you’re willing to keep for a longer time, it might actually make good sense in the long run.
Longer-Term Car Loans Can Make Sense, for Some
But do these longer loans make financial sense? If you get a good interest rate, they can.
If you’re the kind of person who tends to keep new cars for a long time, and the lower monthly payment on a longer-term loan makes it comfortably affordable, longer-term loans can be a useful tool. And keeping a car for a long time nearly always works out better — financially speaking, at least — than buying a new one every few years.
The risk with any car loan is that if your financial situation changes and you have to sell the car, you could end up owing more on the loan than your car is worth at that moment. Obviously, the longer the loan, the greater the risk that your financial situation will change before you’ve paid it off. It’s hard to really know what your finances will look like five, six or seven years from now.
But if you’re comfortable that you can handle that risk, these longer-term loans can give you a way to get into the ride of your dreams at a price — or at least a monthly payment — that’s comfortably affordable.
Motley Fool contributor John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Investing for the long term? Check out our free report on one great stock to buy for 2015 and beyond.