Americans keep stretching auto loans to make car payments affordable
New data shows auto loans lasting longer than 73 months are on the rise big time.
Longer terms usually mean more paid in interest.
At the end of 2020, the average price for a new car ticked past $40,000 for the first time. In the first quarter of this year, the average price fell, but still hung around $38,000. To meet rising car prices, Americans continue to extend auto loan terms even further, and new data from TrueCar released at the end of March shows the trend in full swing.
Since February 2020, the number of Americans who financed a car for 84 months grew by 13%, but the number of auto loans with a term greater than 72 months now make up 30% of all loans. It's simple to see why car buyers are so tempted to take the longer-term loans, however.
Looking at the average $38,000 car, a 60-month term creates $718 car payments each month. Drag it out to 84 months, and you're down to $538 per month. That's a big difference. We can't discount the fact that a lot of automakers ran emergency 0% financing deals at the height of shutdowns during the pandemic in 2020. For those that got away with a long-term loan at 0% APR, it's a screaming-good deal, and one we likely won't see return for a long time.
For those that didn't snag a 0% financing deal, the downside to a longer-term loan is more interested paid over time. Back to the $38,000 car, TrueCar shows the buyer will pay $5,026 over 60 months with a 5% interest rate. For an 84-month term, it jumps to $7,115 in interest. New car buyers may also end up paying for repairs while making car payments with these long-term loans, too, depending on a manufacturer's warranty.
No matter which way it shakes out, new cars are more expensive than ever, and the trend doesn't seem to be slowing down with the rise of SUVs and pickup trucks.
