The Dangerous Side of Car Loans
By Tracy L. Hirsch
Here’s how long-term car loans can lead to massive debt, and why you should avoid them.
Purchasing a car can be a stressful ordeal if you don’t have the funds to pay cash. If you have good credit, then you’ll probably be able to secure an auto loan at a good interest rate, as long as the term of the loan is a reasonable length.
When working with a car dealership, they’re of course going to try to convince you to buy a car that’s outside of your budget.
It can actually be tempting now that lenders are offering 72-month and 84-month loans. While it initially looks like a good deal since your monthly car payment will be lower when it’s spread out over 84 months compared to 48 months, it’s usually too good to be true.
Here are three reasons why long-term car loans aren’t a good idea.
1. You are automatically “upside down” financially. This means that the amount you owe to your lender is more than your car is actually worth. The longer the payback period is on the car loan, the more interest you’ll be paying. In addition to that, if the amount you’re borrowing is on the high side, your interest over the length of the loan will be exorbitant.
For example, if you take out an 84-month loan for a $45,000 new car at 7.5% interest and $0 down, you’ll be paying a whopping $13,000 in interest over the next 7 years (and have a $700 a month car payment during that entire time).
Since cars depreciate quickly, adding an additional $13,000 in interest to the purchase price (as well as thousands of dollars in taxes, titles, and fees) puts you in the negative in terms of equity. The bottom line is that the shorter your loan length is, the more quickly you’ll build up equity in your car.
Long-term car loans may look appealing, but they come with a steep price (literally).
2. Your interest rate will be higher if your loan is longer than 60 months. According to car experts like Edmunds, borrowers pay higher interest rates when the length of their car loan is extremely long (72 or 84 months).
Additionally, studies have shown that when borrowers sign up for a longer loan, they’re tempted to borrow more money, which means they end up buying a car they can’t afford.
To be direct, if you can’t afford the monthly payments for a 48-month or 60-month car loan, then it’s time to look at a less expensive car. If the only way that you can afford the payments on a car is to pay it over an 84-month period (that’s seven years), then it’s not a wise investment.
3. You’ll end up paying for repairs while still making your monthly car payments. A car that is seven years old will probably have close to 80,000 miles on it. The more miles you have, the more likely it is that you’ll have to invest money in maintenance and repairs.
If you can barely afford a monthly payment on a 7-year loan, you won’t be able to afford any necessary repairs that come with it.
If we use our previous example shown in point #1, your $700 a month car payment would be all the more painful even if you had a relatively “small” repair that costs $800.
Paying $1,500 in one month on the car alone would put most people in the red in terms of their monthly budget. Groceries, insurance premiums, and a mortgage payment take up most paychecks, and a car payment and repairs shouldn’t be equivalent to that amount.
So is it possible to get a car loan that won’t harm you in the long run? Yes!
Car loans can be a major blessing if you live within your means, and financing a car responsibly is the foundation for making a wise investment. While most of us would rather drive a Range Rover than a Hyundai Elantra, we have to stay grounded in reality in terms of our budgets.
While driving a fancy car may feel good in the moment, you’ll feel ten times better knowing that purchasing the Hyundai will save you thousands of dollars in interest and monthly payments.
Ideally, it’s best to take out a car loan that can be paid in 48 months or less. For example, if you can do it in 36 months, you’ll not only save on interest, but you’ll also be done with your car payments after three years.
That’s something to look forward to, as your car will most likely still be in great running condition in three years as opposed to seven.
All that to be said, if you’re currently in a situation where you’re behind on your car payments, or your car has been repossessed in Kentucky or southern Indiana, all hope is not lost. You can try to refinance, or, if you have other debts that can’t be paid, you can file for bankruptcy.
I offer free consultations, where we can discuss your options. More often than not, I can help you keep your car, and negotiate a much lower interest rate on your car loan through a bankruptcy plan.
You can call or text me on my cell phone at (502) 435-2593, and together, we can figure out a plan that works for you!
All the best,
Tracy L. Hirsch
Attorney-at-Law
Call or text me directly at (502) 435-2593 to get started!