Hacking Your Car Loan

Analysts have been noticing a disturbing trend lately in the auto finance world.  There has been a marked increase in the number of long term car loans (that is to say, five or more years), with the greatest increase coming form the number of six year loans on the books. 

Longer term car loans are nice if you can’t afford high payments, but like many things that are more convenient, it is much more expensive on the whole. 

Leasing a car has become an option for more people than ever before as well.  Something on the order of 20% or more of new car sales last year were in the form of leases.  That statistic adds up to people wanting more car for less money.  By stretching out your car loan or leasing, you make the financial outlay less per month than buying on a shorter loan, and therefore making it  possible to get more for what you pay.

On the whole, cars with the same features from year to year and the same size are actually going down in price, but people are generally buying bigger cars with a higher level of luxury.  Another factor that may be causing the increasingly long lives of auto loans is the bettter quality of cars that are available now.  100,000 miles is no longer a large number on odometers.  If your car is going to last that long, why finance it for three years when you can cut down your payments by financing for six years instead? 

A long loan may sound like a good idea, but be aware that the longer your loan is, the more you actually end up paying.  The lender makes money on the interest on the car loan, not the principal, so the longer you carry principal, the more money the lender makes.  That’s not the only downside to longer auto loans. 

The longer you have a car on the road, the more likely it is to require major repairs or become involved in a wreck.  If you get into a wreck with your car that you haven’t paid off yet, too bad.  You still have to pay off that loan, even though you may be forced to take on another loan to buy a replacement. 

Longer terms allow loans to get upside down and stay that way longer.  Remember that an upside down car loan isn’t all that bad, unless you try to trade in or sell a car that has an upside down loan on it.  You’ll end up owing more money than you think. 

Some buyers have figured out a way around the whole ‘loan balance remaining’ problem when looking for a new car.  They just roll the old balance over into the total amount of the new loan.  To compensate for the higher payments and extra debt obligations, the loan is stretched out longer than the buyer normally would.  This of course presents the same problems that we’ve been discussing. 

Leasing a car is perhaps a better option for you if you like to turn your cars in after two or three years.  There is usually a down payment involved, but the payments are relatively small compared to buying the car outright.  After the term of the lease is up, you trade up for a new car.  Since the payments are based on the depreciation of the car’s value, the company who leased it to you simply sells it for what it is worth after you give it back. 

You might be wondering why someone would pay all that money to not own a car, but the fact of the matter is that some people simply get a new car every three years or so.  They have accepted the fact that they will always have a car payment, so why not just get a new car every three years? 

Most lease agreements, however, include financial penalties for damaging the car or driving more than a certain number of miles per year.  These can add up quickly, so if you’re not the kind of person to take extra good care of your car, then leasing isn’t right for you.

If you’re going to buy a car instead of leasing it, you should know your financing options before you head into the battleground that is the dealership.  Most people with good credit can pick and choose who they get financing from, so they will either have a loan already arranged through a third party, or use their ability to choose as leverage to negotiate a better deal with company financing.

Of course, if you really want a fool proof way to keep your payments to a minimum, don’t buy an expensive car.  Used cars are often just as good a quality as new cars (as long as you buy it from a reputable used car dealer), and anything with less than 50,000 miles or so will most likely give you years of good service for sometimes less than half the price of a new car.  Used car loans can be slightly higher than new car loan rates which will add some cost to the total purchase.

Remember that the price of the car is the important part, not the monthly payment.  You can use several tricks and methods to reduce the amount you pay per month, but the purchase price is (or should be) the driving force behind your choice of car.

Tags: auto loans, car loan rates, car loans, used car loan rates, used car loans

This entry was posted on Saturday, February 21st, 2009 at 3:44 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.