![]() “Over five years, with an estimated 4 percent return, that pool of funds would yield close to $15,000, which is nearly $3,000 more than the positive equity position you’d find yourself in at the end of a 60-month loan with a 3 percent interest rate.” “A savvy and engaged consumer would take the 0 percent, 84-month loan and siphon the $223 monthly savings into an investment,” he says. Basing his calculations on a vehicle price of $38,000, he came up with a rough outline of the potential benefit. Under normal circumstances-with a higher-interest or shorter-term loan-the monthly payment would be higher than it would be with no-interest financing. Nana-Sinkam says that a disciplined consumer could use a long-term 0 percent auto loan as a way to free up financial resources for investment (although no-interest loans are no longer common like they were during the early days of the pandemic, when manufacturers were eager to kick-start flagging sales). ![]() Nana-Sinkam says that even though a payment deferral delays paying off a loan and can increase the total amount paid, three months isn’t likely to make an alarming difference. Deferral programs delay the onset of financial responsibility by several months as the vehicle continues to depreciate. ![]() Payment deferrals, while appealing to customers facing employment instability amid economic turmoil, amount to kicking the financial can down the road. You don’t notice the change year over year, but if you step back and look at what is happening to consumer household budgets, you see many people really straining to keep up with the rising costs of vehicle ownership.” “It’s sort of like the frog in the pot of lukewarm water that is gradually heating up. “Stretching out the payments doesn’t make the car itself more affordable if you take the longer view,” he says. And as CR has said before, the cost of car ownership usually exceeds monthly payments on a loan. Based on TrueCar’s research, most new vehicles that are sold-as opposed to leased-end up being sold again as used cars four or five years later.īell says stagnant household incomes and rising vehicle prices have led to a situation where automobile ownership is taking a bigger bite out of people’s monthly budget. “We know there are layers to vehicle ownership, from people who flip leases on new vehicles to people struggling to afford the payment of a subprime ‘buy here, pay here’ loan on an 8- to 10-year-old vehicle,” says Alain Nana-Sinkam, TrueCar’s vice president of strategic initiatives. Total-loss accidents notwithstanding, keeping a vehicle paid for with a long-term auto loan for many years could, technically, work out for the consumer. “Consumers may also be more receptive to a long-term loan as vehicles are lasting longer on the road,” she says.Īccording to TrueCar, a CR partner that tracks the auto industry, cars are, in fact, lasting longer than ever before-an average of 12 years. She also says a general increase in vehicle prices has made affordability a problem for many car shoppers. “Consumers have increasingly been gravitating toward more expensive vehicles, such as trucks and SUVs, so long-term loans may offer a way to offset monthly costs,” says Carolyn Gasbarra, a spokesperson for TransUnion, a credit reporting agency. So why do people take out loans that last longer than many people keep cars? The simple answer is to make it possible to stretch and buy more car. “Now, many households are spending an average of 11 percent just on car payments alone.” “In the past, the rule of thumb for car financing was the 20-4-10 rule: Make a 20 percent down payment, take a 48-month loan, and spend no more than 10 percent of your budget on all vehicle expenses, including maintenance and insurance,” he says. In the case of an accident that totals the car, that could mean a financial disaster.Ĭhuck Bell, programs director for advocacy at Consumer Reports, recommends that consumers take a conservative approach to how much they spend on a vehicle. That means there could be a period when you owe more than your vehicle is worth, also known as being underwater or upside-down. That’s because some cars depreciate at a faster pace than a loan can be paid down, especially over so many years. But before you go out and sign on to a six- or seven-year commitment on a new car, even at a very low percentage rate, Consumer Reports’ experts advise crunching some numbers. Even so, there are still financing offers out there, and low-interest financing on long-term auto loans has quickly become the norm. Production delays caused by the global semiconductor shortage have caused shortages on dealership lots. Finding a new car can be tricky in the current market.
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