Car loan: Figuring out how long – or short – your term should be

car loan

The following post originally appeared on our RoadLoans blogThe Open Road.

Wander through the world of car loans – as most of us do every several years – and you’ll almost certainly find two things:

1. Experts agree that the shorter a car loan the better due largely to savings on interest costs.

2. Car buyers are getting longer and longer loan terms – with some taking out financing as long as 96 months, or eight years – and an average transaction price around $31,000.

“For the past decade, the average car loan term has slowly crept past five years, and is now close to five-and-a-half years,” according to Edmunds.com. “Thirty-eight percent of the auto loans in 2012 had terms of five-and-a-half years to six years. And 12 percent of the loans were for terms of six to seven years.”

“The biggest area of growth in auto loans is among those with repayment periods of 73 to 84 months … At seven years, these loans last nearly as long as the typical marriage ending in divorce, according to the U.S. Census,” MarketWatch.com recently reported.

“Extended terms are gaining traction in an era when cars last longer and have better warranties,” according to the Los Angeles Times in a recent story by Jerry Hirsch.

So, what’s right for you? How you navigate the auto financing waters depends upon your financial circumstances. For most people, paying cash isn’t an option, so it’ll be a choice among loan terms.

Here’s what Edmunds.com says about longer loan terms:

Higher Interest Costs

The longer you finance a car, the more interest you will have to pay on it. Edmunds recommends a five-year loan, less if you can manage it.

Negative Equity

A new car typically depreciates about 22 percent in its first year. At the beginning of a car loan, the buyer is typically “upside down,” or “under water,” meaning he owes more than the car is worth. The situation is made worse if the buyer hasn’t made a large enough down payment.

Car Fatigue

We love our cars when they are brand-new, but when romance fades, we’re anxious to trade them in for something else. The average trade-in age for a car in 2012 was 5.9 years.

Low Resale Value

Resale value is another reason to steer clear of extra-long car loans. A five-year-old car is more desirable and more valuable in the used-car marketplace than a seven-year-old vehicle.

RoadLoans offers auto loans up to 72 months, or six years.

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