The risks associated with long-term car loans
A growing number of car buyers are choosing to take out long-term car loans. Forty-two percent of all the car loans made in the last year were for six years or longer, according to a new report from the Consumer Financial Protection Bureau (CFPB).
A longer loan is appealing because it lowers the monthly car payment, but it also drives up the cost of buying that car.
“The move to longer-term auto loans is opening up more risk for consumers,” CFPB Director Richard Cordray said in a statement. “These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car.”
Today’s cars can easily last 10 years or more, but with a longer loan you could find yourself in a situation where you can’t drive that vehicle and still owe money on it.
Consumer Reports gives this example:
Your car is stolen or totaled in an accident. The payment you get from your insurance company, which is based on depreciated value, is less than what you still owe – because you have a long-term loan. Where would that leave you?
If you can't make the numbers work with a five-year loan, chances are you're buying a car that's too expensive.
The CFPB found that buyers with longer-term loans are more likely to default. In fact, someone with a six-year loan is about twice as likely as someone with a five-year loan to default.
Remember, the key here is to base your decision on the total cost of that vehicle, not on what the monthly payment will be.